We Like These Underlying Return On Capital Trends At EA Holdings Berhad (KLSE:EAH)

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So when we looked at EA Holdings Berhad (KLSE:EAH) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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)

0.073 = RM8.5m ÷ (RM131m - RM15m) (Based on the trailing twelve months to March 2023).

So, EA Holdings Berhad has an ROCE of 7.3%. In absolute terms, that's a low return and it also under-performs the IT industry average of 22%.

View our latest analysis for EA Holdings Berhad

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating EA Holdings Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From EA Holdings Berhad's ROCE Trend?

We're delighted to see that EA Holdings Berhad is reaping rewards from its investments and has now broken into profitability. While the business is profitable now, it used to be incurring losses on invested capital five years ago. In regards to capital employed, EA Holdings Berhad is using 29% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. EA Holdings Berhad could be selling under-performing assets since the ROCE is improving.

The Bottom Line

From what we've seen above, EA Holdings Berhad has managed to increase it's returns on capital all the while reducing it's capital base. And since the stock has fallen 60% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing: We've identified 2 warning signs with EA Holdings Berhad (at least 1 which makes us a bit uncomfortable) , and understanding them would certainly be useful.

While EA 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.