Stock Analysis

What Do The Returns On Capital At Gadang Holdings Berhad (KLSE:GADANG) Tell Us?

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KLSE:GADANG
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Did you know there are some financial metrics that can provide clues of a potential 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Gadang Holdings Berhad (KLSE:GADANG) and its ROCE trend, we weren't exactly thrilled.

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 Gadang Holdings Berhad, this is the formula:

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

0.029 = RM36m ÷ (RM1.8b - RM524m) (Based on the trailing twelve months to August 2020).

Thus, Gadang Holdings Berhad has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Construction industry average of 5.2%.

See our latest analysis for Gadang Holdings Berhad

roce
KLSE:GADANG Return on Capital Employed November 30th 2020

Above you can see how the current ROCE for Gadang Holdings Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Gadang Holdings Berhad here for free.

The Trend Of ROCE

In terms of Gadang Holdings Berhad's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.9% from 16% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From Gadang Holdings Berhad's ROCE

Bringing it all together, while we're somewhat encouraged by Gadang Holdings Berhad's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has declined 38% over the last five years, investors may not be too optimistic on this trend improving either. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

One final note, you should learn about the 4 warning signs we've spotted with Gadang Holdings Berhad (including 1 which is shouldn't be ignored) .

While Gadang Holdings 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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