We're Watching These Trends At Bermaz Auto Berhad (KLSE:BAUTO)

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Bermaz Auto Berhad (KLSE:BAUTO) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Bermaz Auto Berhad:

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

0.058 = RM43m ÷ (RM1.3b - RM556m) (Based on the trailing twelve months to July 2020).

So, Bermaz Auto Berhad has an ROCE of 5.8%. Ultimately, that's a low return and it under-performs the Specialty Retail industry average of 10%.

See our latest analysis for Bermaz Auto Berhad

Above you can see how the current ROCE for Bermaz Auto Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Bermaz Auto Berhad.

How Are Returns Trending?

On the surface, the trend of ROCE at Bermaz Auto Berhad doesn't inspire confidence. Around five years ago the returns on capital were 49%, but since then they've fallen to 5.8%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 43%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Bottom Line On Bermaz Auto Berhad's ROCE

In summary, we're somewhat concerned by Bermaz Auto Berhad's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last five years have experienced a 11% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Bermaz Auto Berhad does have some risks, we noticed 2 warning signs (and 1 which is concerning) we think you should know about.

While Bermaz Auto 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. 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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