GHL Systems Berhad (KLSE:GHLSYS) Will Will Want To Turn Around Its Return Trends

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at GHL Systems Berhad (KLSE:GHLSYS) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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 GHL Systems Berhad is:

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

0.044 = RM22m ÷ (RM688m - RM183m) (Based on the trailing twelve months to December 2020).

Therefore, GHL Systems Berhad has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the IT industry average of 10%.

View 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.

So How Is GHL Systems Berhad's ROCE Trending?

In terms of GHL Systems Berhad's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 7.5%, but since then they've fallen to 4.4%. 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 may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line On GHL Systems Berhad's ROCE

In summary, GHL Systems Berhad is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 217% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

If you want to continue researching GHL Systems Berhad, you might be interested to know about the 1 warning sign that our analysis has discovered.

While GHL Systems 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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