Cape EMS Berhad (KLSE:CEB) Is Reinvesting At Lower Rates Of Return

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 Cape EMS Berhad (KLSE:CEB), it didn't seem to tick all of these boxes.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Cape EMS Berhad, this is the formula:

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

0.10 = RM61m ÷ (RM906m - RM314m) (Based on the trailing twelve months to June 2024).

Thus, Cape EMS Berhad has an ROCE of 10%. That's a pretty standard return and it's in line with the industry average of 9.9%.

View our latest analysis for Cape EMS Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Cape EMS Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Cape EMS Berhad.

What Can We Tell From Cape EMS Berhad's ROCE Trend?

The trend of ROCE doesn't look fantastic because it's fallen from 14% four years ago, while the business's capital employed increased by 579%. Usually this isn't ideal, but given Cape EMS Berhad conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Cape EMS Berhad probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt. Additionally, we found that Cape EMS Berhad's most recent EBIT figure is around the same as the prior year, so we'd attribute the drop in ROCE mostly to the capital raise.

On a related note, Cape EMS Berhad has decreased its current liabilities to 35% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Cape EMS Berhad's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Cape EMS Berhad. However, despite the promising trends, the stock has fallen 67% over the last year, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Cape EMS Berhad does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those is significant...

While Cape EMS 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.