EITA Resources Berhad (KLSE:EITA) Might Be Having Difficulty Using Its Capital Effectively

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating EITA Resources Berhad (KLSE:EITA), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for EITA Resources Berhad, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.11 = RM24m ÷ (RM290m - RM75m) (Based on the trailing twelve months to December 2020).

So, EITA Resources Berhad has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 9.1% it's much better.

Check out our latest analysis for EITA Resources Berhad

Above you can see how the current ROCE for EITA Resources Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

On the surface, the trend of ROCE at EITA Resources Berhad doesn't inspire confidence. Over the last five years, returns on capital have decreased to 11% from 21% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line On EITA Resources Berhad's ROCE

In summary, we're somewhat concerned by EITA Resources Berhad's diminishing returns on increasing amounts of capital. However the stock has delivered a 70% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you want to continue researching EITA Resources Berhad, you might be interested to know about the 3 warning signs that our analysis has discovered.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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