Be Wary Of HSS Engineers Berhad (KLSE:HSSEB) And Its Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Although, when we looked at HSS Engineers Berhad (KLSE:HSSEB), it didn't seem to tick all of these boxes.

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 HSS Engineers Berhad, this is the formula:

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

0.047 = RM13m ÷ (RM371m - RM94m) (Based on the trailing twelve months to September 2021).

So, HSS Engineers Berhad has an ROCE of 4.7%. Ultimately, that's a low return and it under-performs the Construction industry average of 6.2%.

View our latest analysis for HSS Engineers Berhad

Above you can see how the current ROCE for HSS Engineers 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 HSS Engineers Berhad here for free.

So How Is HSS Engineers Berhad's ROCE Trending?

On the surface, the trend of ROCE at HSS Engineers Berhad doesn't inspire confidence. To be more specific, ROCE has fallen from 28% over the last five years. However it looks like HSS Engineers Berhad might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, HSS Engineers Berhad has decreased its current liabilities to 25% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From HSS Engineers Berhad's ROCE

Bringing it all together, while we're somewhat encouraged by HSS Engineers Berhad's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly, the stock has only gained 18% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One more thing to note, we've identified 3 warning signs with HSS Engineers Berhad and understanding these should be part of your investment process.

While HSS Engineers 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.

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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