Edelteq Holdings Berhad (KLSE:EDELTEQ) Might Be Having Difficulty Using Its Capital Effectively

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Edelteq Holdings Berhad (KLSE:EDELTEQ), it didn't seem to tick all of these boxes.

Understanding 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. To calculate this metric for Edelteq Holdings Berhad, this is the formula:

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

0.098 = RM4.8m ÷ (RM56m - RM6.1m) (Based on the trailing twelve months to June 2024).

Thus, Edelteq Holdings Berhad has an ROCE of 9.8%. In absolute terms, that's a low return but it's around the Semiconductor industry average of 8.4%.

Check out our latest analysis for Edelteq Holdings Berhad

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

What Does the ROCE Trend For Edelteq Holdings Berhad Tell Us?

In terms of Edelteq Holdings Berhad's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 27% over the last four years. However it looks like Edelteq Holdings Berhad might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Edelteq Holdings Berhad has decreased its current liabilities to 11% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

To conclude, we've found that Edelteq Holdings Berhad is reinvesting in the business, but returns have been falling. Since the stock has declined 18% over the last year, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Edelteq Holdings Berhad does have some risks, we noticed 3 warning signs (and 1 which is potentially serious) we think you should know about.

While Edelteq Holdings 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. 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.