E.A. Technique (M) Berhad (KLSE:EATECH) Is Experiencing Growth In Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 E.A. Technique (M) Berhad's (KLSE:EATECH) returns on capital, so let's have a look.

What Is 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. To calculate this metric for E.A. Technique (M) Berhad, this is the formula:

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

0.15 = RM25m ÷ (RM520m - RM361m) (Based on the trailing twelve months to March 2023).

Thus, E.A. Technique (M) Berhad has an ROCE of 15%. That's a pretty standard return and it's in line with the industry average of 15%.

Check out our latest analysis for E.A. Technique (M) Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for E.A. Technique (M) Berhad's ROCE against it's prior returns. If you're interested in investigating E.A. Technique (M) Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From E.A. Technique (M) Berhad's ROCE Trend?

We're delighted to see that E.A. Technique (M) Berhad is reaping rewards from its investments and has now broken into profitability. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 15% on their capital employed. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 64%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 69% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

In Conclusion...

In a nutshell, we're pleased to see that E.A. Technique (M) Berhad has been able to generate higher returns from less capital. Astute investors may have an opportunity here because the stock has declined 63% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

E.A. Technique (M) Berhad does have some risks, we noticed 4 warning signs (and 3 which make us uncomfortable) we think you should know about.

While E.A. Technique (M) 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.