What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Alcom Group Berhad's (KLSE:ALCOM) returns on capital, so let's have a look.
What is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Alcom Group Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = RM36m ÷ (RM467m - RM180m) (Based on the trailing twelve months to June 2021).
Thus, Alcom Group Berhad has an ROCE of 13%. That's a relatively normal return on capital, and it's around the 12% generated by the Metals and Mining industry.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Alcom Group Berhad's ROCE against it's prior returns. If you're interested in investigating Alcom Group Berhad's past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From Alcom Group Berhad's ROCE Trend?
Investors would be pleased with what's happening at Alcom Group Berhad. The data shows that returns on capital have increased substantially over the last five years to 13%. The amount of capital employed has increased too, by 62%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 39% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.
All in all, it's terrific to see that Alcom Group Berhad is reaping the rewards from prior investments and is growing its capital base. Since the stock has only returned 38% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
If you want to know some of the risks facing Alcom Group Berhad we've found 3 warning signs (2 shouldn't be ignored!) that you should be aware of before investing here.
While Alcom Group 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.
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