Be Wary Of Hiap Teck Venture Berhad (KLSE:HIAPTEK) And Its Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Having said that, from a first glance at Hiap Teck Venture Berhad (KLSE:HIAPTEK) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. Analysts use this formula to calculate it for Hiap Teck Venture Berhad:

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

0.06 = RM79m ÷ (RM2.0b - RM686m) (Based on the trailing twelve months to January 2024).

Thus, Hiap Teck Venture Berhad has an ROCE of 6.0%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.0%.

See our latest analysis for Hiap Teck Venture Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hiap Teck Venture Berhad's ROCE against it's prior returns. If you'd like to look at how Hiap Teck Venture Berhad has performed in the past in other metrics, you can view this free graph of Hiap Teck Venture Berhad's past earnings, revenue and cash flow.

The Trend Of ROCE

When we looked at the ROCE trend at Hiap Teck Venture Berhad, we didn't gain much confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 6.0%. However it looks like Hiap Teck Venture 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 Key Takeaway

To conclude, we've found that Hiap Teck Venture Berhad is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 76% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we've found 1 warning sign for Hiap Teck Venture Berhad that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.