Here's What's Concerning About Cnergenz Berhad's (KLSE:CNERGEN) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Cnergenz Berhad (KLSE:CNERGEN), it didn't seem to tick all of these boxes.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Cnergenz Berhad, this is the formula:

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

0.16 = RM26m ÷ (RM231m - RM68m) (Based on the trailing twelve months to June 2023).

So, Cnergenz Berhad has an ROCE of 16%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Electronic industry average of 13%.

Check out our latest analysis for Cnergenz Berhad

Above you can see how the current ROCE for Cnergenz 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.

What The Trend Of ROCE Can Tell Us

In terms of Cnergenz Berhad's historical ROCE movements, the trend isn't fantastic. Around four years ago the returns on capital were 51%, but since then they've fallen to 16%. However it looks like Cnergenz 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's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Cnergenz Berhad has done well to pay down its current liabilities to 30% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

To conclude, we've found that Cnergenz Berhad is reinvesting in the business, but returns have been falling. And investors appear hesitant that the trends will pick up because the stock has fallen 20% in the last year. Therefore based on the analysis done in this article, we don't think Cnergenz Berhad has the makings of a multi-bagger.

Cnergenz Berhad does have some risks though, and we've spotted 2 warning signs for Cnergenz Berhad that you might be interested in.

While Cnergenz 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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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.