Our Take On The Returns On Capital At Gagasan Nadi Cergas Berhad (KLSE:NADIBHD)

What are the early trends we should look for to identify a stock that could 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. Although, when we looked at Gagasan Nadi Cergas Berhad (KLSE:NADIBHD), it didn't seem to tick all of these boxes.

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. To calculate this metric for Gagasan Nadi Cergas Berhad, this is the formula:

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

0.0044 = RM3.4m ÷ (RM900m - RM119m) (Based on the trailing twelve months to September 2020).

Thus, Gagasan Nadi Cergas Berhad has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 4.9%.

Check out our latest analysis for Gagasan Nadi Cergas Berhad

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

What The Trend Of ROCE Can Tell Us

In terms of Gagasan Nadi Cergas Berhad's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 8.8%, but since then they've fallen to 0.4%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

Our Take On Gagasan Nadi Cergas Berhad's ROCE

In summary, we're somewhat concerned by Gagasan Nadi Cergas Berhad's diminishing returns on increasing amounts of capital. However the stock has delivered a 16% return to shareholders over the last year, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you'd like to know more about Gagasan Nadi Cergas Berhad, we've spotted 5 warning signs, and 2 of them make us uncomfortable.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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