Stock Analysis

Is Radiant Globaltech Berhad (KLSE:RGTECH) Likely To Turn Things Around?

KLSE:RGTECH
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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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Radiant Globaltech Berhad (KLSE:RGTECH) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is 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. Analysts use this formula to calculate it for Radiant Globaltech Berhad:

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

0.084 = RM5.5m ÷ (RM86m - RM21m) (Based on the trailing twelve months to June 2020).

So, Radiant Globaltech Berhad has an ROCE of 8.4%. On its own, that's a low figure but it's around the 10% average generated by the Electronic industry.

See our latest analysis for Radiant Globaltech Berhad

roce
KLSE:RGTECH Return on Capital Employed November 20th 2020

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 Radiant Globaltech Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Radiant Globaltech Berhad Tell Us?

In terms of Radiant Globaltech Berhad's historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 8.4% from 35% four years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Radiant Globaltech Berhad has decreased its current liabilities to 25% of total assets. So we could link some of this to the decrease in ROCE. 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.

The Key Takeaway

In summary, despite lower returns in the short term, we're encouraged to see that Radiant Globaltech Berhad is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 26% to shareholders over the last year. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Radiant Globaltech Berhad does have some risks, we noticed 2 warning signs (and 1 which is a bit concerning) we think you should know about.

While Radiant Globaltech 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. 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.
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