Returns At Harrisons Holdings (Malaysia) Berhad (KLSE:HARISON) Are On The Way Up

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Harrisons Holdings (Malaysia) Berhad (KLSE:HARISON) and its trend of ROCE, we really liked what we saw.

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. Analysts use this formula to calculate it for Harrisons Holdings (Malaysia) Berhad:

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

0.12 = RM49m ÷ (RM762m - RM366m) (Based on the trailing twelve months to December 2020).

So, Harrisons Holdings (Malaysia) Berhad has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Trade Distributors industry average of 6.4% it's much better.

See our latest analysis for Harrisons Holdings (Malaysia) Berhad

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

What Does the ROCE Trend For Harrisons Holdings (Malaysia) Berhad Tell Us?

We like the trends that we're seeing from Harrisons Holdings (Malaysia) Berhad. Over the last five years, returns on capital employed have risen substantially to 12%. Basically the business is earning more per dollar of capital invested and in addition to that, 35% more capital is being employed now too. So we're very much inspired by what we're seeing at Harrisons Holdings (Malaysia) Berhad thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that Harrisons Holdings (Malaysia) Berhad has a current liabilities to total assets ratio of 48%, which we'd consider pretty high. 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.

The Key Takeaway

To sum it up, Harrisons Holdings (Malaysia) Berhad has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 85% return over the last five years. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you'd like to know about the risks facing Harrisons Holdings (Malaysia) Berhad, we've discovered 2 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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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