Returns On Capital - An Important Metric For Quality Concrete Holdings Berhad (KLSE:QUALITY)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Quality Concrete Holdings Berhad's (KLSE:QUALITY) returns on capital, so let's have a look.

What is 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. Analysts use this formula to calculate it for Quality Concrete Holdings Berhad:

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

0.04 = RM4.5m ÷ (RM228m - RM115m) (Based on the trailing twelve months to July 2020).

So, Quality Concrete Holdings Berhad has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 9.3%.

Check out our latest analysis for Quality Concrete Holdings Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Quality Concrete Holdings Berhad's ROCE against it's prior returns. If you'd like to look at how Quality Concrete Holdings 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 Quality Concrete Holdings Berhad Tell Us?

Quality Concrete Holdings Berhad has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 4.0%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

On a separate but related note, it's important to know that Quality Concrete Holdings Berhad has a current liabilities to total assets ratio of 51%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

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. Astute investors may have an opportunity here because the stock has declined 14% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

Quality Concrete Holdings Berhad does have some risks, we noticed 3 warning signs (and 2 which are significant) we think you should know about.

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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