Investors Will Want Ecobuilt Holdings Berhad's (KLSE:ECOHLDS) Growth In ROCE To Persist

To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Ecobuilt Holdings Berhad (KLSE:ECOHLDS) looks quite promising in regards to its trends of return on capital.

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. Analysts use this formula to calculate it for Ecobuilt Holdings Berhad:

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

0.059 = RM7.6m ÷ (RM195m - RM66m) (Based on the trailing twelve months to August 2021).

Thus, Ecobuilt Holdings Berhad has an ROCE of 5.9%. In absolute terms, that's a low return and it also under-performs the Software industry average of 15%.

View our latest analysis for Ecobuilt 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 want to delve into the historical earnings, revenue and cash flow of Ecobuilt Holdings Berhad, check out these free graphs here.

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

The fact that Ecobuilt Holdings Berhad is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 5.9% on its capital. And unsurprisingly, like most companies trying to break into the black, Ecobuilt Holdings Berhad is utilizing 73% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 34% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Bottom Line

Long story short, we're delighted to see that Ecobuilt Holdings Berhad's reinvestment activities have paid off and the company is now profitable. Astute investors may have an opportunity here because the stock has declined 23% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.

Like most companies, Ecobuilt Holdings Berhad does come with some risks, and we've found 2 warning signs that you should be aware of.

While Ecobuilt Holdings Berhad isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.