The Trends At A-Rank Berhad (KLSE:ARANK) That You Should Know About

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think A-Rank Berhad (KLSE:ARANK) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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 A-Rank Berhad:

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

0.025 = RM5.0m ÷ (RM280m - RM79m) (Based on the trailing twelve months to October 2020).

Thus, A-Rank Berhad has an ROCE of 2.5%. On its own, that's a low figure but it's around the 2.9% average generated by the Metals and Mining industry.

Check out our latest analysis for A-Rank 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 A-Rank Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at A-Rank Berhad doesn't inspire confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 2.5%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From A-Rank Berhad's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for A-Rank Berhad have fallen, meanwhile the business is employing more capital than it was five years ago. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 45% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

A-Rank Berhad does have some risks, we noticed 5 warning signs (and 3 which shouldn't be ignored) we think you should know about.

While A-Rank 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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