Concrete Engineering Products Berhad (KLSE:CEPCO) Shareholders Will Want The ROCE Trajectory To Continue

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Speaking of which, we noticed some great changes in Concrete Engineering Products Berhad's (KLSE:CEPCO) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for Concrete Engineering Products Berhad:

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

0.08 = RM4.8m ÷ (RM135m - RM76m) (Based on the trailing twelve months to November 2022).

Thus, Concrete Engineering Products Berhad has an ROCE of 8.0%. On its own that's a low return, but compared to the average of 3.1% generated by the Basic Materials industry, it's much better.

Check out our latest analysis for Concrete Engineering Products 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 Concrete Engineering Products Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Like most people, we're pleased that Concrete Engineering Products Berhad is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 8.0% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 53%. This could potentially mean that the company is selling some of its assets.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 56% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

In Conclusion...

In summary, it's great to see that Concrete Engineering Products Berhad has been able to turn things around and earn higher returns on lower amounts of capital. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 20% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

If you want to know some of the risks facing Concrete Engineering Products Berhad we've found 2 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.