The Return Trends At EA Holdings Berhad (KLSE:EAH) Look Promising

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in EA Holdings Berhad's (KLSE:EAH) returns on capital, so let's have a look.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on EA Holdings Berhad is:

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

0.0094 = RM1.3m ÷ (RM145m - RM9.1m) (Based on the trailing twelve months to June 2022).

Thus, EA Holdings Berhad has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the IT industry average of 9.2%.

See our latest analysis for EA Holdings Berhad

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

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

Shareholders will be relieved that EA Holdings Berhad has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 0.9%, which is always encouraging. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.

The Key Takeaway

To bring it all together, EA Holdings Berhad has done well to increase the returns it's generating from its capital employed. Although the company may be facing some issues elsewhere since the stock has plunged 90% in the last five years. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

If you want to know some of the risks facing EA Holdings Berhad we've found 4 warning signs (3 are significant!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.