GE-Shen Corporation Berhad (KLSE:GESHEN) Will Be Hoping To Turn Its Returns On Capital Around

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at GE-Shen Corporation Berhad (KLSE:GESHEN), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on GE-Shen Corporation Berhad is:

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

0.10 = RM18m ÷ (RM275m - RM92m) (Based on the trailing twelve months to September 2022).

Therefore, GE-Shen Corporation Berhad has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 11% generated by the Packaging industry.

Check out our latest analysis for GE-Shen Corporation 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'd like to look at how GE-Shen Corporation Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For GE-Shen Corporation Berhad Tell Us?

On the surface, the trend of ROCE at GE-Shen Corporation Berhad doesn't inspire confidence. To be more specific, ROCE has fallen from 17% over the last five years. However it looks like GE-Shen Corporation Berhad might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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.

The Bottom Line On GE-Shen Corporation Berhad's ROCE

Bringing it all together, while we're somewhat encouraged by GE-Shen Corporation Berhad's reinvestment in its own business, we're aware that returns are shrinking. And investors appear hesitant that the trends will pick up because the stock has fallen 32% in the last five years. Therefore based on the analysis done in this article, we don't think GE-Shen Corporation Berhad has the makings of a multi-bagger.

On a separate note, we've found 3 warning signs for GE-Shen Corporation Berhad you'll probably want to know about.

While GE-Shen Corporation Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.