Why The 31% Return On Capital At HE Group Berhad (KLSE:HEGROUP) Should Have Your Attention

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. And in light of that, the trends we're seeing at HE Group Berhad's (KLSE:HEGROUP) look very promising so lets take a look.

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Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for HE Group Berhad:

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

0.31 = RM21m ÷ (RM115m - RM48m) (Based on the trailing twelve months to March 2025).

Thus, HE Group Berhad has an ROCE of 31%. In absolute terms that's a great return and it's even better than the Construction industry average of 11%.

See our latest analysis for HE Group Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for HE Group Berhad's ROCE against it's prior returns. If you'd like to look at how HE Group Berhad has performed in the past in other metrics, you can view this free graph of HE Group Berhad's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

HE Group Berhad is displaying some positive trends. The numbers show that in the last four years, the returns generated on capital employed have grown considerably to 31%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 514%. 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.

One more thing to note, HE Group Berhad has decreased current liabilities to 42% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

What We Can Learn From HE Group Berhad's ROCE

To sum it up, HE Group Berhad has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Given the stock has declined 32% in the last year, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

One more thing to note, we've identified 2 warning signs with HE Group Berhad and understanding these should be part of your investment process.

HE Group Berhad is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.