ES Ceramics Technology Berhad's (KLSE:ESCERAM) Returns On Capital Not Reflecting Well On The Business

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating ES Ceramics Technology Berhad (KLSE:ESCERAM), we don't think it's current trends fit the mold of a multi-bagger.

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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. The formula for this calculation on ES Ceramics Technology Berhad is:

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

0.027 = RM6.2m ÷ (RM342m - RM111m) (Based on the trailing twelve months to May 2025).

So, ES Ceramics Technology Berhad has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Building industry average of 8.9%.

View 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'd like to look at how ES Ceramics Technology Berhad has performed in the past in other metrics, you can view this free graph of ES Ceramics Technology Berhad's past earnings, revenue and cash flow.

What Can We Tell From ES Ceramics Technology Berhad's ROCE Trend?

When we looked at the ROCE trend at ES Ceramics Technology Berhad, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.7% from 4.6% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, ES Ceramics Technology Berhad's current liabilities have increased over the last five years to 32% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 2.7%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

What We Can Learn From ES Ceramics Technology Berhad's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for ES Ceramics Technology Berhad. Despite these promising trends, the stock has collapsed 87% over the last five years, so there could be other factors hurting the company's prospects. Regardless, reinvestment can pay off in the long run, so we think astute investors may want to look further into this stock.

ES Ceramics Technology Berhad does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit concerning...

While ES Ceramics Technology Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.