Returns Are Gaining Momentum At Theta Edge Berhad (KLSE:THETA)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. So on that note, Theta Edge Berhad (KLSE:THETA) looks quite promising in regards to its trends of return on capital.

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 Theta Edge Berhad is:

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

0.026 = RM2.1m ÷ (RM128m - RM46m) (Based on the trailing twelve months to June 2024).

Thus, Theta Edge Berhad has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the IT industry average of 15%.

Check out our latest analysis for Theta Edge 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're interested in investigating Theta Edge Berhad's past further, check out this free graph covering Theta Edge Berhad's past earnings, revenue and cash flow.

What Does the ROCE Trend For Theta Edge Berhad Tell Us?

We're delighted to see that Theta Edge Berhad is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 2.6% on its capital. In addition to that, Theta Edge Berhad is employing 35% more capital than previously which is expected of a company that's trying to break into profitability. 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. Essentially the business now has suppliers or short-term creditors funding about 36% of its operations, which isn't ideal. 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.

What We Can Learn From Theta Edge Berhad's ROCE

In summary, it's great to see that Theta Edge Berhad has managed to break into profitability and is continuing to reinvest in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Theta Edge Berhad can keep these trends up, it could have a bright future ahead.

Theta Edge Berhad does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are potentially serious...

While Theta Edge 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.