What Do The Returns On Capital At Ranhill Utilities Berhad (KLSE:RANHILL) Tell Us?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after investigating Ranhill Utilities Berhad (KLSE:RANHILL), we don't think it's current trends fit the mold of a multi-bagger.

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. Analysts use this formula to calculate it for Ranhill Utilities Berhad:

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

0.09 = RM196m ÷ (RM2.6b - RM438m) (Based on the trailing twelve months to September 2020).

Therefore, Ranhill Utilities Berhad has an ROCE of 9.0%. In absolute terms, that's a low return, but it's much better than the Water Utilities industry average of 7.2%.

Check out 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

The returns on capital haven't changed much for Ranhill Utilities Berhad in recent years. Over the past five years, ROCE has remained relatively flat at around 9.0% and the business has deployed 20% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

On a side note, Ranhill Utilities Berhad has done well to reduce current liabilities to 17% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Key Takeaway

In conclusion, Ranhill Utilities Berhad has been investing more capital into the business, but returns on that capital haven't increased. Although the market must be expecting these trends to improve because the stock has gained 69% over the last three years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

One final note, you should learn about the 3 warning signs we've spotted with Ranhill Utilities Berhad (including 2 which are potentially serious) .

While Ranhill Utilities Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. 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.
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