The Trend Of High Returns At REDtone Digital Berhad (KLSE:REDTONE) Has Us Very Interested

There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of REDtone Digital Berhad (KLSE:REDTONE) looks great, so lets see what the trend can tell us.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its 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)

0.21 = RM52m ÷ (RM332m - RM77m) (Based on the trailing twelve months to December 2022).

So, REDtone Digital Berhad has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Telecom industry average of 9.0%.

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'd like to look at how REDtone Digital Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

SWOT Analysis for REDtone Digital Berhad

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 21%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 77%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

In Conclusion...

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what REDtone Digital Berhad has. And a remarkable 170% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.

REDtone Digital Berhad does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.