Returns On Capital Signal Tricky Times Ahead For Radiant Globaltech Berhad (KLSE:RGTECH)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Radiant Globaltech Berhad (KLSE:RGTECH) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

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. The formula for this calculation on Radiant Globaltech Berhad is:

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

0.16 = RM13m ÷ (RM128m - RM46m) (Based on the trailing twelve months to December 2022).

So, Radiant Globaltech Berhad has an ROCE of 16%. By itself that's a normal return on capital and it's in line with the industry's average returns of 16%.

Check out 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.

How Are Returns Trending?

In terms of Radiant Globaltech Berhad's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 16% from 30% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Radiant Globaltech Berhad's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 18% in the last three years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

One more thing, we've spotted 1 warning sign facing Radiant Globaltech Berhad that you might find interesting.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.