Will the Promising Trends At Guan Chong Berhad (KLSE:GCB) Continue?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Guan Chong Berhad (KLSE:GCB) so let's look a bit deeper.

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)

0.18 = RM236m ÷ (RM2.7b - RM1.4b) (Based on the trailing twelve months to September 2020).

Thus, Guan Chong Berhad has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 6.8% it's much better.

See 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From Guan Chong Berhad's ROCE Trend?

We like the trends that we're seeing from Guan Chong Berhad. The data shows that returns on capital have increased substantially over the last five years to 18%. Basically the business is earning more per dollar of capital invested and in addition to that, 147% more capital is being employed now too. So we're very much inspired by what we're seeing at Guan Chong Berhad thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 51%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

What We Can Learn From Guan Chong Berhad's ROCE

All in all, it's terrific to see that Guan Chong Berhad is reaping the rewards from prior investments and is growing its capital base. And a remarkable 357% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Guan Chong Berhad can keep these trends up, it could have a bright future ahead.

One final note, you should learn about the 4 warning signs we've spotted with Guan Chong Berhad (including 1 which is concerning) .

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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