Investors Will Want Cheetah Holdings Berhad's (KLSE:CHEETAH) Growth In ROCE To Persist

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Cheetah Holdings Berhad's (KLSE:CHEETAH) returns on capital, so let's have a look.

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 Cheetah Holdings Berhad, this is the formula:

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

0.04 = RM5.2m ÷ (RM140m - RM10m) (Based on the trailing twelve months to March 2021).

Therefore, Cheetah Holdings Berhad has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Luxury industry average of 8.6%.

Check out our latest analysis for Cheetah Holdings Berhad

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

So How Is Cheetah Holdings Berhad's ROCE Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 258% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. 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...

In summary, we're delighted to see that Cheetah Holdings Berhad has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

Cheetah Holdings Berhad does have some risks though, and we've spotted 2 warning signs for Cheetah Holdings Berhad that you might be interested in.

While Cheetah 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.
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