Uzma Berhad (KLSE:UZMA) Is Reinvesting At Lower Rates Of Return

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. In light of that, when we looked at Uzma Berhad (KLSE:UZMA) and its ROCE trend, we weren't exactly thrilled.

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Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Uzma Berhad:

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

0.063 = RM76m ÷ (RM1.7b - RM473m) (Based on the trailing twelve months to December 2024).

So, Uzma Berhad has an ROCE of 6.3%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 13%.

View our latest analysis for Uzma Berhad

Above you can see how the current ROCE for Uzma Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Uzma Berhad for free.

What Can We Tell From Uzma Berhad's ROCE Trend?

Unfortunately, the trend isn't great with ROCE falling from 9.1% five years ago, while capital employed has grown 25%. That being said, Uzma Berhad raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. Uzma Berhad probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

The Key Takeaway

While returns have fallen for Uzma Berhad in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. In light of this, the stock has only gained 1.8% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

Uzma Berhad does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are significant...

While Uzma 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.