Cloudpoint Technology Berhad (KLSE:CLOUDPT) Could Be Struggling To Allocate Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, while the ROCE is currently high for Cloudpoint Technology Berhad (KLSE:CLOUDPT), we aren't jumping out of our chairs because returns are decreasing.

We've discovered 1 warning sign about Cloudpoint Technology Berhad. View them for free.

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. The formula for this calculation on Cloudpoint Technology Berhad is:

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

0.33 = RM27m ÷ (RM160m - RM79m) (Based on the trailing twelve months to December 2024).

Therefore, Cloudpoint Technology Berhad has an ROCE of 33%. In absolute terms that's a great return and it's even better than the IT industry average of 13%.

View our latest analysis for Cloudpoint Technology Berhad

In the above chart we have measured Cloudpoint Technology Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Cloudpoint Technology Berhad .

What Does the ROCE Trend For Cloudpoint Technology Berhad Tell Us?

When we looked at the ROCE trend at Cloudpoint Technology Berhad, we didn't gain much confidence. To be more specific, while the ROCE is still high, it's fallen from 41% where it was five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Cloudpoint Technology Berhad's current liabilities have increased over the last five years to 49% of total assets, effectively distorting the ROCE to some degree. 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 Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Cloudpoint Technology Berhad is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 16% over the last year, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.

Cloudpoint Technology Berhad does have some risks though, and we've spotted 1 warning sign for Cloudpoint Technology Berhad that you might be interested in.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.

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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.