Asia Brands Berhad (KLSE:ASIABRN) Is Doing The Right Things To Multiply Its Share Price

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Asia Brands Berhad's (KLSE:ASIABRN) returns on capital, so let's have a look.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Asia Brands Berhad is:

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

0.095 = RM23m ÷ (RM286m - RM42m) (Based on the trailing twelve months to March 2022).

Thus, Asia Brands Berhad has an ROCE of 9.5%. On its own that's a low return, but compared to the average of 7.4% generated by the Retail Distributors industry, it's much better.

View our latest analysis for Asia Brands Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Asia Brands Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Asia Brands Berhad, check out these free graphs here.

What Can We Tell From Asia Brands Berhad's ROCE Trend?

Asia Brands Berhad has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 9.5% on its capital. And unsurprisingly, like most companies trying to break into the black, Asia Brands Berhad is utilizing 79% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 15%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line

Long story short, we're delighted to see that Asia Brands Berhad's reinvestment activities have paid off and the company is now profitable. Given the stock has declined 13% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

Asia Brands Berhad does have some risks though, and we've spotted 1 warning sign for Asia Brands Berhad that you might be interested in.

While Asia Brands Berhad isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.