Is EITA Resources Berhad (KLSE:EITA) Likely To Turn Things Around?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at EITA Resources Berhad (KLSE:EITA) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed 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 ÷ (RM303m - RM95m) (Based on the trailing twelve months to September 2020).

So, EITA Resources Berhad has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 10% generated by the Machinery industry.

See our latest analysis for EITA Resources Berhad

In the above chart we have measured EITA Resources Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for EITA Resources Berhad.

What Does the ROCE Trend For EITA Resources Berhad Tell Us?

When we looked at the ROCE trend at EITA Resources Berhad, we didn't gain much confidence. To be more specific, ROCE has fallen from 20% over the last five years. However it looks like EITA Resources Berhad might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On EITA Resources Berhad's ROCE

To conclude, we've found that EITA Resources Berhad is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 110% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Like most companies, EITA Resources Berhad does come with some risks, and we've found 3 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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