Returns Are Gaining Momentum At Eden Berhad (KLSE:EDEN)

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Eden Berhad (KLSE:EDEN) so let's look a bit deeper.

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. The formula for this calculation on Eden Berhad is:

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

0.026 = RM8.3m ÷ (RM390m - RM72m) (Based on the trailing twelve months to March 2023).

Thus, Eden Berhad has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Renewable Energy industry average of 7.1%.

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

How Are Returns Trending?

Shareholders will be relieved that Eden Berhad has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 2.6%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 18%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Key Takeaway

As discussed above, Eden Berhad appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And since the stock has fallen 48% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you'd like to know more about Eden Berhad, we've spotted 2 warning signs, and 1 of them is potentially serious.

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.