NCT Alliance Berhad's (KLSE:NCT) Returns Have Hit A Wall

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at NCT Alliance Berhad (KLSE:NCT) and its ROCE trend, we weren't exactly thrilled.

What is 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. The formula for this calculation on NCT Alliance Berhad is:

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

0.076 = RM12m ÷ (RM202m - RM46m) (Based on the trailing twelve months to March 2021).

Therefore, NCT Alliance Berhad has an ROCE of 7.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.6%.

Check out our latest analysis for NCT Alliance 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'd like to look at how NCT Alliance Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For NCT Alliance Berhad Tell Us?

Things have been pretty stable at NCT Alliance Berhad, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect NCT Alliance Berhad to be a multi-bagger going forward.

On a side note, NCT Alliance Berhad has done well to reduce current liabilities to 23% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Bottom Line On NCT Alliance Berhad's ROCE

We can conclude that in regards to NCT Alliance Berhad's returns on capital employed and the trends, there isn't much change to report on. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 150% gain to shareholders who have held over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we found 4 warning signs for NCT Alliance Berhad (1 can't be ignored) you should be aware of.

While NCT Alliance 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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