Investors Could Be Concerned With Edelteq Holdings Berhad's (KLSE:EDELTEQ) Returns On Capital

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'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Edelteq Holdings Berhad (KLSE:EDELTEQ) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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

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)

0.088 = RM5.1m ÷ (RM195m - RM137m) (Based on the trailing twelve months to March 2025).

Therefore, 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 7.0%.

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.

How Are Returns Trending?

On the surface, the trend of ROCE at Edelteq Holdings Berhad doesn't inspire confidence. Around five years ago the returns on capital were 20%, but since then they've fallen to 8.8%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Edelteq Holdings Berhad's current liabilities have increased over the last five years to 70% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 8.8%. 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.

Our Take On Edelteq Holdings Berhad's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Edelteq Holdings Berhad. These trends don't appear to have influenced returns though, because the total return from the stock has been mostly flat over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One final note, you should learn about the 4 warning signs we've spotted with Edelteq Holdings Berhad (including 1 which is a bit concerning) .

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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.