Here's What To Make Of ATA IMS Berhad's (KLSE:ATAIMS) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at ATA IMS Berhad (KLSE:ATAIMS) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is Return On Capital Employed (ROCE)?

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. The formula for this calculation on ATA IMS Berhad is:

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

0.15 = RM134m ÷ (RM2.5b - RM1.6b) (Based on the trailing twelve months to September 2020).

So, ATA IMS Berhad has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 11% generated by the Packaging industry.

Check out our latest analysis for ATA IMS Berhad

Above you can see how the current ROCE for ATA IMS Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering ATA IMS Berhad here for free.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at ATA IMS Berhad doesn't inspire confidence. To be more specific, ROCE has fallen from 33% over the last three years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

Another thing to note, ATA IMS Berhad has a high ratio of current liabilities to total assets of 65%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On ATA IMS Berhad's ROCE

In summary, ATA IMS Berhad is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 34% over the last year. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One final note, you should learn about the 2 warning signs we've spotted with ATA IMS Berhad (including 1 which is doesn't sit too well with us) .

While ATA IMS 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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