Will Awanbiru Technology Berhad (KLSE:AWANTEC) Multiply In Value Going Forward?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. 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.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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 8.4%.

See our latest analysis for Awanbiru Technology Berhad

In the above chart we have measured Awanbiru Technology Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Awanbiru Technology Berhad here for free.

What Can We Tell From Awanbiru Technology Berhad's ROCE Trend?

In terms of Awanbiru Technology Berhad's historical ROCE movements, the trend isn't fantastic. 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. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 30%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. 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.

The Bottom Line

In summary, we're somewhat concerned by Awanbiru Technology Berhad's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 58% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Awanbiru Technology Berhad (including 1 which is a bit unpleasant) .

While Awanbiru Technology 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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