Returns At GHL Systems Berhad (KLSE:GHLSYS) Appear To Be Weighed Down

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at GHL Systems Berhad (KLSE:GHLSYS), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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)

0.08 = RM43m ÷ (RM770m - RM233m) (Based on the trailing twelve months to December 2021).

So, GHL Systems Berhad has an ROCE of 8.0%. On its own, that's a low figure but it's around the 9.2% average generated by the IT industry.

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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

The returns on capital haven't changed much for GHL Systems Berhad in recent years. Over the past five years, ROCE has remained relatively flat at around 8.0% and the business has deployed 92% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line On GHL Systems Berhad's ROCE

As we've seen above, GHL Systems Berhad's returns on capital haven't increased but it is reinvesting in the business. Since the stock has gained an impressive 92% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you're still interested in GHL Systems Berhad it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

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.