Stella Holdings Berhad (KLSE:STELLA) Shareholders Will Want The ROCE Trajectory To Continue

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. So when we looked at Stella Holdings Berhad (KLSE:STELLA) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

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. Analysts use this formula to calculate it for Stella Holdings Berhad:

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

0.072 = RM5.3m ÷ (RM120m - RM46m) (Based on the trailing twelve months to March 2022).

Therefore, Stella Holdings Berhad has an ROCE of 7.2%. In absolute terms, that's a low return, but it's much better than the Construction industry average of 5.2%.

Check out our latest analysis for Stella Holdings Berhad

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

What Can We Tell From Stella Holdings Berhad's ROCE Trend?

Stella Holdings Berhad is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 179% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.

In Conclusion...

To bring it all together, Stella Holdings Berhad has done well to increase the returns it's generating from its capital employed. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Stella Holdings Berhad can keep these trends up, it could have a bright future ahead.

On a final note, we found 3 warning signs for Stella Holdings Berhad (1 is a bit unpleasant) you should be aware of.

While Stella Holdings 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.