The Trend Of High Returns At ES Ceramics Technology Berhad (KLSE:ESCERAM) Has Us Very Interested

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of ES Ceramics Technology Berhad (KLSE:ESCERAM) looks great, so lets see what the trend can tell us.

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

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)

0.22 = RM17m ÷ (RM109m - RM31m) (Based on the trailing twelve months to February 2021).

Thus, ES Ceramics Technology Berhad has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 6.4% earned by companies in a similar industry.

Check out our latest analysis for ES Ceramics Technology Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for ES Ceramics Technology Berhad's ROCE against it's prior returns. 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 past earnings, revenue and cash flow.

So How Is ES Ceramics Technology Berhad's ROCE Trending?

Investors would be pleased with what's happening at ES Ceramics Technology Berhad. The data shows that returns on capital have increased substantially over the last five years to 22%. The amount of capital employed has increased too, by 87%. 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 29% 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.

The Key Takeaway

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. Therefore, we think it would be worth your time to check if these trends are going to continue.

One more thing: We've identified 4 warning signs with ES Ceramics Technology Berhad (at least 1 which is a bit concerning) , and understanding these would certainly be useful.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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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