Returns On Capital Are A Standout For ES Ceramics Technology Berhad (KLSE:ESCERAM)

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in ES Ceramics Technology Berhad's (KLSE:ESCERAM) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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. 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)

0.49 = RM53m ÷ (RM137m - RM29m) (Based on the trailing twelve months to November 2021).

Thus, ES Ceramics Technology Berhad has an ROCE of 49%. In absolute terms that's a great return and it's even better than the Building industry average of 6.3%.

See our latest analysis for ES Ceramics Technology Berhad

In the above chart we have measured ES Ceramics Technology 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 ES Ceramics Technology Berhad.

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

We like the trends that we're seeing from ES Ceramics Technology Berhad. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 49%. 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 132%. So we're very much inspired by what we're seeing at ES Ceramics Technology Berhad thanks to its ability to profitably reinvest capital.

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. The current liabilities has increased to 21% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

In Conclusion...

All in all, it's terrific to see that ES Ceramics Technology Berhad is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a solid 74% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

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

ES Ceramics Technology Berhad is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.