Asia Brands Berhad's (KLSE:ASIABRN) Returns On Capital Are Heading Higher

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Asia Brands Berhad (KLSE:ASIABRN) looks quite promising in regards to its trends of return on capital.

Understanding 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. Analysts use this formula to calculate it for Asia Brands Berhad:

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

0.091 = RM22m ÷ (RM293m - RM52m) (Based on the trailing twelve months to March 2021).

Therefore, Asia Brands Berhad has an ROCE of 9.1%. On its own that's a low return, but compared to the average of 6.8% generated by the Retail Distributors industry, it's much better.

Check out our latest analysis for Asia Brands 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 Asia Brands Berhad, check out these free graphs here.

The Trend Of ROCE

Asia Brands Berhad has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 9.1% on its capital. In addition to that, Asia Brands Berhad is employing 24% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a related note, the company's ratio of current liabilities to total assets has decreased to 18%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

Our Take On Asia Brands Berhad's ROCE

Long story short, we're delighted to see that Asia Brands Berhad's reinvestment activities have paid off and the company is now profitable. Astute investors may have an opportunity here because the stock has declined 33% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a separate note, we've found 2 warning signs for Asia Brands Berhad you'll probably want to know about.

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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