Quality Concrete Holdings Berhad's (KLSE:QUALITY) Returns On Capital Are Heading Higher

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. So when we looked at Quality Concrete Holdings Berhad (KLSE:QUALITY) and its trend of ROCE, we really liked what we saw.

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. To calculate this metric for Quality Concrete Holdings Berhad, this is the formula:

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

0.053 = RM6.0m ÷ (RM270m - RM156m) (Based on the trailing twelve months to January 2023).

Thus, Quality Concrete Holdings Berhad has an ROCE of 5.3%. In absolute terms, that's a low return, but it's much better than the Basic Materials industry average of 3.9%.

See our latest analysis for Quality Concrete Holdings 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 want to delve into the historical earnings, revenue and cash flow of Quality Concrete Holdings Berhad, check out these free graphs here.

The Trend Of ROCE

Shareholders will be relieved that Quality Concrete Holdings Berhad has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 5.3% on its capital. While returns have increased, the amount of capital employed by Quality Concrete Holdings Berhad has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 58% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

In Conclusion...

In summary, we're delighted to see that Quality Concrete Holdings Berhad has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Considering the stock has delivered 0.6% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for Quality Concrete Holdings Berhad (of which 1 makes us a bit uncomfortable!) that you should know about.

While Quality Concrete Holdings 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.