ES Ceramics Technology Berhad (KLSE:ESCERAM) Could Become A Multi-Bagger

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. And in light of that, the trends we're seeing at ES Ceramics Technology Berhad's (KLSE:ESCERAM) look very promising so lets take a look.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for ES Ceramics Technology Berhad, this is the formula:

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

0.41 = RM35m ÷ (RM136m - RM51m) (Based on the trailing twelve months to May 2021).

Therefore, ES Ceramics Technology Berhad has an ROCE of 41%. That's a fantastic return and not only that, it outpaces the average of 9.1% earned by companies in a similar industry.

Check out our latest analysis for ES Ceramics Technology Berhad

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of ES Ceramics Technology Berhad, check out these free graphs here.

What Does the ROCE Trend For ES Ceramics Technology Berhad Tell Us?

ES Ceramics Technology Berhad is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 41%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 97%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 38% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

In Conclusion...

To sum it up, ES Ceramics Technology Berhad has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if ES Ceramics Technology Berhad can keep these trends up, it could have a bright future ahead.

On a separate note, we've found 3 warning signs for ES Ceramics Technology Berhad you'll probably want to know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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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