Stock Analysis

Return Trends At Gamuda Berhad (KLSE:GAMUDA) Aren't Appealing

KLSE:GAMUDA
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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Having said that, from a first glance at Gamuda Berhad (KLSE:GAMUDA) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Gamuda Berhad, this is the formula:

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

0.036 = RM507m ÷ (RM18b - RM4.5b) (Based on the trailing twelve months to July 2021).

So, Gamuda Berhad has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Construction industry average of 6.2%.

See our latest analysis for Gamuda Berhad

roce
KLSE:GAMUDA Return on Capital Employed November 18th 2021

In the above chart we have measured Gamuda Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Gamuda Berhad here for free.

The Trend Of ROCE

There hasn't been much to report for Gamuda Berhad's returns and its level of capital employed because both metrics have been steady for the past five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Gamuda Berhad to be a multi-bagger going forward. This probably explains why Gamuda Berhad is paying out 40% of its income to shareholders in the form of dividends. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.

The Key Takeaway

We can conclude that in regards to Gamuda Berhad's returns on capital employed and the trends, there isn't much change to report on. Since the stock has declined 27% 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.

If you'd like to know about the risks facing Gamuda Berhad, we've discovered 1 warning sign that you should be aware of.

While Gamuda Berhad isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

Valuation is complex, but we're helping make it simple.

Find out whether Gamuda Berhad is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.

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