Radiant Globaltech Berhad (KLSE:RGTECH) Might Be Having Difficulty Using Its Capital Effectively

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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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.

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 Radiant Globaltech Berhad:

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

0.16 = RM13m ÷ (RM108m - RM31m) (Based on the trailing twelve months to March 2022).

So, Radiant Globaltech Berhad has an ROCE of 16%. On its own, that's a standard return, however it's much better than the 13% generated by the Electronic industry.

View our latest analysis for Radiant Globaltech Berhad

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

So How Is Radiant Globaltech Berhad's ROCE Trending?

When we looked at the ROCE trend at Radiant Globaltech Berhad, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 16% from 33% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. 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 28% 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.

What We Can Learn From Radiant Globaltech Berhad's ROCE

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. Furthermore the stock has climbed 63% over the last three years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

On a final note, we've found 3 warning signs for Radiant Globaltech Berhad that we think you should be aware of.

While Radiant Globaltech 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.