HSS Engineers Berhad (KLSE:HSSEB) Shareholders Will Want The ROCE Trajectory To Continue

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at HSS Engineers Berhad (KLSE:HSSEB) so let's look a bit deeper.

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. The formula for this calculation on HSS Engineers Berhad is:

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

0.11 = RM29m ÷ (RM385m - RM130m) (Based on the trailing twelve months to June 2023).

Therefore, HSS Engineers Berhad has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 5.0% generated by the Construction industry.

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?

We're pretty happy with how the ROCE has been trending at HSS Engineers Berhad. The data shows that returns on capital have increased by 72% over the trailing five years. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, HSS Engineers Berhad appears to been achieving more with less, since the business is using 37% less capital to run its operation. HSS Engineers Berhad may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 34% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Bottom Line On HSS Engineers Berhad's ROCE

In summary, it's great to see that HSS Engineers Berhad has been able to turn things around and earn higher returns on lower amounts of capital. And since the stock has fallen 39% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

HSS Engineers Berhad does have some risks though, and we've spotted 1 warning sign for HSS Engineers Berhad that you might be interested in.

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.

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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.