EG Industries Berhad (KLSE:EG) Shareholders Will Want The ROCE Trajectory To Continue

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in EG Industries Berhad's (KLSE:EG) returns on capital, so let's have a look.

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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. To calculate this metric for EG Industries Berhad, this is the formula:

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

0.14 = RM103m ÷ (RM1.4b - RM688m) (Based on the trailing twelve months to December 2024).

Thus, EG Industries Berhad has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Consumer Durables industry average of 5.1% it's much better.

View our latest analysis for EG Industries Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for EG Industries Berhad's ROCE against it's prior returns. If you'd like to look at how EG Industries Berhad has performed in the past in other metrics, you can view this free graph of EG Industries Berhad's past earnings, revenue and cash flow .

So How Is EG Industries Berhad's ROCE Trending?

We like the trends that we're seeing from EG Industries Berhad. The data shows that returns on capital have increased substantially over the last five years to 14%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 111%. So we're very much inspired by what we're seeing at EG Industries Berhad thanks to its ability to profitably reinvest capital.

On a separate but related note, it's important to know that EG Industries Berhad has a current liabilities to total assets ratio of 48%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

To sum it up, EG Industries Berhad has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a staggering 588% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Like most companies, EG Industries Berhad does come with some risks, and we've found 2 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.