Zelan Berhad (KLSE:ZELAN) Shareholders Will Want The ROCE Trajectory To Continue

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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Zelan Berhad (KLSE:ZELAN) looks quite promising in regards to its trends of return on capital.

What is Return On Capital Employed (ROCE)?

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. 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)

0.089 = RM52m ÷ (RM854m - RM268m) (Based on the trailing twelve months to March 2021).

Thus, Zelan Berhad has an ROCE of 8.9%. On its own that's a low return, but compared to the average of 6.7% generated by the Construction industry, it's much better.

View our latest analysis for Zelan Berhad

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

So How Is Zelan Berhad's ROCE Trending?

Zelan Berhad has broken into the black (profitability) and we're sure it's a sight for sore eyes. While the business was unprofitable in the past, it's now turned things around and is earning 8.9% 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. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

The Bottom Line

To sum it up, Zelan Berhad is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has fallen 27% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you want to know some of the risks facing Zelan Berhad we've found 3 warning signs (1 is significant!) that you should be aware of before investing here.

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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