The Return Trends At Quality Concrete Holdings Berhad (KLSE:QUALITY) Look Promising

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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Quality Concrete Holdings Berhad (KLSE:QUALITY) so let's look a bit deeper.

What is 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 Quality Concrete Holdings Berhad:

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

0.052 = RM6.0m ÷ (RM229m - RM114m) (Based on the trailing twelve months to October 2020).

Thus, Quality Concrete Holdings Berhad has an ROCE of 5.2%. In absolute terms, that's a low return and it also 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 want to delve into the historical earnings, revenue and cash flow of Quality Concrete Holdings Berhad, check out these free graphs here.

How Are Returns Trending?

Quality Concrete Holdings Berhad has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 5.2% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Quality Concrete Holdings Berhad has remained flat over the period. 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. Because in the end, a business can only get so efficient.

Another thing to note, Quality Concrete Holdings Berhad has a high ratio of current liabilities to total assets of 50%. 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.

The Key Takeaway

To bring it all together, Quality Concrete Holdings Berhad has done well to increase the returns it's generating from its capital employed. And since the stock has fallen 28% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

One final note, you should learn about the 2 warning signs we've spotted with Quality Concrete Holdings Berhad (including 1 which is a bit concerning) .

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. 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.
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