Stock Analysis

Is Esthetics International Group Berhad (KLSE:EIG) Likely To Turn Things Around?

KLSE:EIG
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If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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 investigating Esthetics International Group Berhad (KLSE:EIG), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Esthetics International Group Berhad, this is the formula:

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

0.01 = RM2.0m ÷ (RM271m - RM67m) (Based on the trailing twelve months to June 2020).

Therefore, Esthetics International Group Berhad has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Consumer Services industry average of 8.4%.

See our latest analysis for Esthetics International Group Berhad

roce
KLSE:EIG Return on Capital Employed November 18th 2020

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Esthetics International Group Berhad, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

In terms of Esthetics International Group Berhad's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.0% from 12% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for Esthetics International Group Berhad have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 39% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about Esthetics International Group Berhad, we've spotted 4 warning signs, and 1 of them is a bit unpleasant.

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. 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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