There Are Reasons To Feel Uneasy About Emico Holdings Berhad's (KLSE:EMICO) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Emico Holdings Berhad (KLSE:EMICO) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Emico Holdings Berhad is:

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

0.086 = RM6.6m ÷ (RM101m - RM24m) (Based on the trailing twelve months to December 2024).

So, Emico Holdings Berhad has an ROCE of 8.6%. In absolute terms, that's a low return, but it's much better than the Consumer Durables industry average of 5.0%.

Check out our latest analysis for Emico Holdings Berhad

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

What Does the ROCE Trend For Emico Holdings Berhad Tell Us?

When we looked at the ROCE trend at Emico Holdings Berhad, we didn't gain much confidence. To be more specific, ROCE has fallen from 18% over the last five years. However it looks like Emico Holdings Berhad might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

To conclude, we've found that Emico Holdings Berhad is reinvesting in the business, but returns have been falling. Although the market must be expecting these trends to improve because the stock has gained 47% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we've found 2 warning signs for Emico Holdings Berhad that we think you should be aware of.

While Emico 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.