We Like These Underlying Trends At Omesti Berhad (KLSE:OMESTI)

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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. So on that note, Omesti Berhad (KLSE:OMESTI) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Omesti Berhad:

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

0.092 = RM24m ÷ (RM515m - RM250m) (Based on the trailing twelve months to December 2020).

Thus, Omesti Berhad has an ROCE of 9.2%. In absolute terms, that's a low return but it's around the Electronic industry average of 10%.

View our latest analysis for Omesti 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 Omesti Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Omesti Berhad Tell Us?

Like most people, we're pleased that Omesti Berhad is now generating some pretax earnings. While the business is profitable now, it used to be incurring losses on invested capital five years ago. Additionally, the business is utilizing 20% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

On a side note, Omesti Berhad's current liabilities are still rather high at 49% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Omesti Berhad's ROCE

From what we've seen above, Omesti Berhad has managed to increase it's returns on capital all the while reducing it's capital base. Since the stock has only returned 1.0% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

Omesti Berhad does have some risks though, and we've spotted 1 warning sign for Omesti Berhad that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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