Returns Are Gaining Momentum At E.A. Technique (M) Berhad (KLSE:EATECH)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at E.A. Technique (M) Berhad (KLSE:EATECH) so let's look a bit deeper.

Understanding 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. The formula for this calculation on E.A. Technique (M) Berhad is:

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

0.063 = RM10m ÷ (RM531m - RM367m) (Based on the trailing twelve months to December 2022).

Therefore, E.A. Technique (M) Berhad has an ROCE of 6.3%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 16%.

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.

The Trend Of ROCE

It's great to see that E.A. Technique (M) Berhad has started to generate some pre-tax earnings from prior investments. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, E.A. Technique (M) Berhad is using 64% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. E.A. Technique (M) Berhad could be selling under-performing assets since the ROCE is improving.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 69% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

In Conclusion...

In the end, E.A. Technique (M) Berhad has proven it's capital allocation skills are good with those higher returns from less amount of capital. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. With that in mind, we believe the promising trends warrant this stock for further investigation.

One final note, you should learn about the 4 warning signs we've spotted with E.A. Technique (M) Berhad (including 2 which don't sit too well with us) .

While E.A. Technique (M) Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.