Investors Could Be Concerned With Awanbiru Technology Berhad's (KLSE:AWANTEC) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Awanbiru Technology Berhad (KLSE:AWANTEC) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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 Awanbiru Technology Berhad, this is the formula:

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

0.029 = RM6.8m ÷ (RM333m - RM100m) (Based on the trailing twelve months to December 2020).

Thus, Awanbiru Technology Berhad has an ROCE of 2.9%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 7.6%.

Check out our latest analysis for Awanbiru Technology Berhad

Above you can see how the current ROCE for Awanbiru Technology Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Awanbiru Technology Berhad.

So How Is Awanbiru Technology Berhad's ROCE Trending?

On the surface, the trend of ROCE at Awanbiru Technology Berhad doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.9% from 9.8% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Awanbiru Technology Berhad's current liabilities have increased over the last five years to 30% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 2.9%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Awanbiru Technology Berhad have fallen, meanwhile the business is employing more capital than it was five years ago. Long term shareholders who've owned the stock over the last five years have experienced a 52% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Awanbiru Technology Berhad does have some risks, we noticed 2 warning signs (and 1 which is a bit concerning) we think you should know about.

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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