Will The ROCE Trend At Central Global Berhad (KLSE:CGB) Continue?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So on that note, Central Global Berhad (KLSE:CGB) looks quite promising in regards to its trends of return on capital.

What is Return On Capital Employed (ROCE)?

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

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

0.043 = RM2.4m ÷ (RM91m - RM36m) (Based on the trailing twelve months to September 2020).

So, Central Global Berhad has an ROCE of 4.3%. In absolute terms, that's a low return but it's around the Commercial Services industry average of 5.2%.

See our latest analysis for Central Global Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Central Global Berhad's ROCE against it's prior returns. If you're interested in investigating Central Global Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Central Global Berhad's ROCE Trend?

We're delighted to see that Central Global Berhad is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 4.3%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. 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. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 39% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Bottom Line On Central Global Berhad's ROCE

To sum it up, Central Global Berhad is collecting higher returns from the same amount of capital, and that's impressive. And with a respectable 47% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to continue researching Central Global Berhad, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Central Global 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. 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.
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