Will The ROCE Trend At EA Holdings Berhad (KLSE:EAH) Continue?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, EA Holdings Berhad (KLSE:EAH) looks quite promising in regards to its trends of return on capital.

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. The formula for this calculation on EA Holdings Berhad is:

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

0.012 = RM1.5m ÷ (RM135m - RM10m) (Based on the trailing twelve months to September 2020).

Thus, EA Holdings Berhad has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the IT industry average of 7.8%.

Check out 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.

So How Is EA Holdings Berhad's ROCE Trending?

We're delighted to see that EA Holdings Berhad is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 1.2% which is no doubt a relief for some early shareholders. In regards to capital employed, EA Holdings Berhad is using 23% 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. This could potentially mean that the company is selling some of its assets.

The Bottom Line On EA Holdings Berhad's ROCE

In a nutshell, we're pleased to see that EA Holdings Berhad has been able to generate higher returns from less capital. Astute investors may have an opportunity here because the stock has declined 39% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

If you want to know some of the risks facing EA Holdings Berhad we've found 3 warning signs (1 is a bit concerning!) 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.

When trading EA Holdings Berhad or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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