Returns Are Gaining Momentum At Zelan Berhad (KLSE:ZELAN)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. With that in mind, we've noticed some promising trends at Zelan Berhad (KLSE:ZELAN) so let's look a bit deeper.

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

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 Zelan Berhad, this is the formula:

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

0.019 = RM11m ÷ (RM890m - RM320m) (Based on the trailing twelve months to June 2022).

So, Zelan Berhad has an ROCE of 1.9%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 5.1%.

Our analysis indicates that ZELAN is potentially undervalued!

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Zelan Berhad, check out these free graphs here.

What Can We Tell From Zelan Berhad's ROCE Trend?

Shareholders will be relieved that Zelan Berhad has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 1.9% on its capital. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

In Conclusion...

As discussed above, Zelan Berhad appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And since the stock has fallen 62% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

Zelan Berhad does come with some risks though, we found 4 warning signs in our investment analysis, and 3 of those don't sit too well with us...

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.