REDtone Digital Berhad (KLSE:REDTONE) Is Achieving High Returns On Its Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. And in light of that, the trends we're seeing at REDtone Digital Berhad's (KLSE:REDTONE) look very promising so lets take a look.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for REDtone Digital Berhad, this is the formula:

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

0.22 = RM61m ÷ (RM419m - RM146m) (Based on the trailing twelve months to September 2023).

Thus, REDtone Digital Berhad has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 8.8% earned by companies in a similar industry.

Check out our latest analysis for REDtone Digital Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for REDtone Digital Berhad's ROCE against it's prior returns. If you're interested in investigating REDtone Digital Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From REDtone Digital Berhad's ROCE Trend?

We like the trends that we're seeing from REDtone Digital Berhad. The data shows that returns on capital have increased substantially over the last five years to 22%. Basically the business is earning more per dollar of capital invested and in addition to that, 84% more capital is being employed now too. So we're very much inspired by what we're seeing at REDtone Digital Berhad thanks to its ability to profitably reinvest capital.

What We Can Learn From REDtone Digital Berhad's ROCE

To sum it up, REDtone Digital Berhad has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

On a final note, we've found 1 warning sign for REDtone Digital Berhad that we think you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.