The Trends At HSS Engineers Berhad (KLSE:HSSEB) That You Should Know About

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at HSS Engineers Berhad (KLSE:HSSEB) 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. Analysts use this formula to calculate it for HSS Engineers Berhad:

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

0.07 = RM20m ÷ (RM348m - RM67m) (Based on the trailing twelve months to September 2020).

So, HSS Engineers Berhad has an ROCE of 7.0%. In absolute terms, that's a low return, but it's much better than the Construction industry average of 4.9%.

Check out our latest analysis for HSS Engineers Berhad

In the above chart we have measured HSS Engineers Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering HSS Engineers Berhad here for free.

The Trend Of ROCE

When we looked at the ROCE trend at HSS Engineers Berhad, we didn't gain much confidence. Around five years ago the returns on capital were 41%, but since then they've fallen to 7.0%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, HSS Engineers Berhad has done well to pay down its current liabilities to 19% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

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. And investors appear hesitant that the trends will pick up because the stock has fallen 65% in the last three years. Therefore based on the analysis done in this article, we don't think HSS Engineers Berhad has the makings of a multi-bagger.

One more thing to note, we've identified 1 warning sign with HSS Engineers Berhad and understanding this should be part of your investment process.

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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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