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

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Zelan Berhad (KLSE:ZELAN) so let's look a bit deeper.

What is Return On Capital Employed (ROCE)?

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. 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)

0.018 = RM10m ÷ (RM874m - RM305m) (Based on the trailing twelve months to March 2022).

Thus, Zelan Berhad has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 5.4%.

Check out 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're interested in investigating Zelan Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

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 1.8% on its capital. While returns have increased, the amount of capital employed by Zelan Berhad has remained flat over the period. 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.

In Conclusion...

In summary, we're delighted to see that Zelan Berhad has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has fallen 65% 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.

Zelan Berhad does come with some risks though, we found 4 warning signs in our investment analysis, and 3 of those are a bit concerning...

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.