We Like These Underlying Trends At Ranhill Utilities Berhad (KLSE:RANHILL)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Ranhill Utilities Berhad (KLSE:RANHILL) and its trend of ROCE, we really liked what we saw.

Return On Capital Employed (ROCE): What is it?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Ranhill Utilities Berhad is:

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

0.096 = RM211m ÷ (RM2.7b - RM510m) (Based on the trailing twelve months to June 2020).

Thus, Ranhill Utilities Berhad has an ROCE of 9.6%. In absolute terms, that's a low return, but it's much better than the Water Utilities industry average of 7.4%.

View our latest analysis for Ranhill Utilities Berhad

Above you can see how the current ROCE for Ranhill Utilities Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Ranhill Utilities Berhad here for free.

The Trend Of ROCE

Ranhill Utilities Berhad has not disappointed with their ROCE growth. Looking at the data, we can see that even though capital employed in the business has remained relatively flat, the ROCE generated has risen by 37% over the last five years. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

The Bottom Line On Ranhill Utilities Berhad's ROCE

As discussed above, Ranhill Utilities 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 with a respectable 51% awarded to those who held the stock over the last three years, you could argue that these trends are starting to get the attention they deserve. 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 found 3 warning signs for Ranhill Utilities Berhad (1 shouldn't be ignored) you should be aware of.

While Ranhill Utilities 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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