Resintech Berhad (KLSE:RESINTC) Could Be Struggling To Allocate Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Resintech Berhad (KLSE:RESINTC) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Resintech Berhad, this is the formula:

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

0.026 = RM5.7m ÷ (RM256m - RM40m) (Based on the trailing twelve months to June 2022).

Therefore, Resintech Berhad has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Machinery industry average of 13%.

See our latest analysis for Resintech Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Resintech Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Resintech Berhad, check out these free graphs here.

How Are Returns Trending?

On the surface, the trend of ROCE at Resintech Berhad doesn't inspire confidence. Around five years ago the returns on capital were 4.3%, but since then they've fallen to 2.6%. However it looks like Resintech 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.

The Bottom Line On Resintech Berhad's ROCE

To conclude, we've found that Resintech Berhad is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 88% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Like most companies, Resintech Berhad does come with some risks, and we've found 5 warning signs that you should be aware of.

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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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.