Analabs Resources Berhad (KLSE:ANALABS) Might Be Having Difficulty Using Its Capital Effectively

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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Analabs Resources Berhad (KLSE:ANALABS) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Analabs Resources Berhad, this is the formula:

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

0.031 = RM9.6m ÷ (RM356m - RM47m) (Based on the trailing twelve months to January 2021).

Therefore, Analabs Resources Berhad has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 7.2%.

View our latest analysis for Analabs Resources Berhad

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Analabs Resources Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Analabs Resources Berhad's ROCE Trend?

On the surface, the trend of ROCE at Analabs Resources Berhad doesn't inspire confidence. Around five years ago the returns on capital were 3.9%, but since then they've fallen to 3.1%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Analabs Resources Berhad's ROCE

To conclude, we've found that Analabs Resources Berhad is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 14% 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.

Analabs Resources Berhad does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is a bit concerning...

While Analabs Resources 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. 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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