Stock Analysis

Returns On Capital At Cloudaron Group Berhad (KLSE:CLOUD) Paint A Concerning Picture

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To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Cloudaron Group Berhad (KLSE:CLOUD) and its ROCE trend, we weren't exactly thrilled.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Cloudaron Group Berhad:

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

0.025 = RM2.1m ÷ (RM104m - RM18m) (Based on the trailing twelve months to September 2022).

So, Cloudaron Group Berhad has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the IT industry average of 12%.

See our latest analysis for Cloudaron Group Berhad

KLSE:CLOUD Return on Capital Employed March 25th 2023

Historical performance is a great place to start when researching a stock so above you can see the gauge for Cloudaron Group Berhad's ROCE against it's prior returns. If you're interested in investigating Cloudaron Group Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Cloudaron Group Berhad Tell Us?

When we looked at the ROCE trend at Cloudaron Group Berhad, we didn't gain much confidence. Around five years ago the returns on capital were 28%, but since then they've fallen to 2.5%. 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 related note, Cloudaron Group Berhad has decreased its current liabilities to 17% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Cloudaron Group Berhad's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Cloudaron Group Berhad is reinvesting for growth and has higher sales as a result. Despite these promising trends, the stock has collapsed 89% over the last five years, so there could be other factors hurting the company's prospects. Therefore, we'd suggest researching the stock further to uncover more about the business.

Cloudaron Group Berhad does have some risks, we noticed 4 warning signs (and 3 which are a bit unpleasant) we think you should know about.

While Cloudaron Group 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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