GHL Systems Berhad (KLSE:GHLSYS) Will Be Hoping To Turn Its Returns On Capital Around

There are a few key trends to look for if we want to identify the next multi-bagger. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating GHL Systems Berhad (KLSE:GHLSYS), we don't think it's current trends fit the mold of a multi-bagger.

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

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. Analysts use this formula to calculate it for GHL Systems Berhad:

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

0.075 = RM40m ÷ (RM717m - RM175m) (Based on the trailing twelve months to March 2022).

So, GHL Systems Berhad has an ROCE of 7.5%. Ultimately, that's a low return and it under-performs the IT industry average of 11%.

Check out our latest analysis for GHL Systems Berhad

Above you can see how the current ROCE for GHL Systems Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering GHL Systems Berhad here for free.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at GHL Systems Berhad, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.5% from 9.9% five years ago. However it looks like GHL Systems Berhad might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From GHL Systems Berhad's ROCE

To conclude, we've found that GHL Systems Berhad is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 15% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

While GHL Systems Berhad doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

While GHL Systems 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.