Eden Berhad (KLSE:EDEN) Is Doing The Right Things To Multiply Its Share Price

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Eden Berhad (KLSE:EDEN) and its trend of ROCE, we really liked what we saw.

What Is Return On Capital Employed (ROCE)?

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 Eden Berhad, this is the formula:

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

0.025 = RM6.6m ÷ (RM363m - RM93m) (Based on the trailing twelve months to June 2022).

Therefore, Eden Berhad has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 7.0%.

View our latest analysis for Eden Berhad

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

How Are Returns Trending?

We're delighted to see that Eden Berhad is reaping rewards from its investments and has now broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 2.5% on its capital. While returns have increased, the amount of capital employed by Eden Berhad has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Bottom Line

In summary, we're delighted to see that Eden Berhad has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Astute investors may have an opportunity here because the stock has declined 13% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing, we've spotted 4 warning signs facing Eden Berhad that you might find interesting.

While Eden 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. 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.