Be Wary Of Three-A Resources Berhad (KLSE:3A) And Its Returns On Capital

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. 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 Three-A Resources Berhad (KLSE:3A) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Three-A Resources Berhad:

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

0.11 = RM41m ÷ (RM432m - RM44m) (Based on the trailing twelve months to December 2020).

Therefore, Three-A Resources Berhad has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 7.3% generated by the Food industry.

See our latest analysis for Three-A Resources Berhad

In the above chart we have measured Three-A Resources 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 Three-A Resources Berhad here for free.

What Can We Tell From Three-A Resources Berhad's ROCE Trend?

When we looked at the ROCE trend at Three-A Resources Berhad, we didn't gain much confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 11%. However it looks like Three-A Resources Berhad might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On Three-A Resources Berhad's ROCE

To conclude, we've found that Three-A Resources Berhad is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 2.2% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

On a final note, we've found 1 warning sign for Three-A Resources Berhad that we think you should be aware of.

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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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