Here's What's Concerning About Edelteq Holdings Berhad's (KLSE:EDELTEQ) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. In light of that, when we looked at Edelteq Holdings Berhad (KLSE:EDELTEQ) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Edelteq Holdings Berhad is:

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

0.088 = RM4.7m ÷ (RM58m - RM4.8m) (Based on the trailing twelve months to September 2024).

So, Edelteq Holdings Berhad has an ROCE of 8.8%. In absolute terms, that's a low return, but it's much better than the Semiconductor industry average of 6.5%.

See 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'd like to look at how Edelteq Holdings Berhad has performed in the past in other metrics, you can view this free graph of Edelteq Holdings Berhad's past earnings, revenue and cash flow.

So How Is Edelteq Holdings Berhad's ROCE Trending?

In terms of Edelteq Holdings Berhad's historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 8.8% from 34% four years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Edelteq Holdings Berhad has done well to pay down its current liabilities to 8.3% of total assets. So we could link some of this to the decrease in ROCE. 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.

Our Take On Edelteq Holdings Berhad's ROCE

To conclude, we've found that Edelteq Holdings Berhad is reinvesting in the business, but returns have been falling. And in the last year, the stock has given away 10% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a final note, we found 3 warning signs for Edelteq Holdings Berhad (1 is a bit unpleasant) you should be aware of.

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.