GDB Holdings Berhad (KLSE:GDB) May Have Issues Allocating Its Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at GDB Holdings Berhad (KLSE:GDB) and its ROCE trend, we weren't exactly thrilled.

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 GDB Holdings Berhad, this is the formula:

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

0.018 = RM3.1m ÷ (RM333m - RM162m) (Based on the trailing twelve months to March 2024).

Therefore, GDB Holdings Berhad has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Construction industry average of 7.7%.

See our latest analysis for GDB Holdings Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for GDB Holdings Berhad's ROCE against it's prior returns. If you're interested in investigating GDB Holdings Berhad's past further, check out this free graph covering GDB Holdings Berhad's past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at GDB Holdings Berhad, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.8% from 33% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

Another thing to note, GDB Holdings Berhad has a high ratio of current liabilities to total assets of 49%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On GDB Holdings Berhad's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for GDB Holdings Berhad have fallen, meanwhile the business is employing more capital than it was five years ago. Yet despite these concerning fundamentals, the stock has performed strongly with a 54% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we found 4 warning signs for GDB Holdings Berhad (1 is significant) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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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