Returns On Capital At Guan Chong Berhad (KLSE:GCB) Have Hit The Brakes

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. So, when we ran our eye over Guan Chong Berhad's (KLSE:GCB) trend of ROCE, we liked what we saw.

Understanding 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. The formula for this calculation on Guan Chong Berhad is:

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

0.14 = RM248m ÷ (RM2.9b - RM1.2b) (Based on the trailing twelve months to December 2020).

So, Guan Chong Berhad has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 7.3% it's much better.

Check out our latest analysis for Guan Chong Berhad

In the above chart we have measured Guan Chong 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 Guan Chong Berhad here for free.

So How Is Guan Chong Berhad's ROCE Trending?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 14% for the last five years, and the capital employed within the business has risen 233% in that time. 14% is a pretty standard return, and it provides some comfort knowing that Guan Chong Berhad has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 40% of total assets, is good to see from a business owner's perspective. Effectively suppliers now fund less of the business, which can lower some elements of risk. We'd like to see this trend continue though because as it stands today, thats still a pretty high level.

In Conclusion...

To sum it up, Guan Chong Berhad has simply been reinvesting capital steadily, at those decent rates of return. And long term investors would be thrilled with the 503% return they've received over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

One more thing: We've identified 3 warning signs with Guan Chong Berhad (at least 2 which are a bit unpleasant) , and understanding these would certainly be useful.

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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