Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 Three-A Resources Berhad (KLSE:3A), we don't think it's current trends fit the mold of a multi-bagger.
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. The formula for this calculation on Three-A Resources Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.068 = RM31m ÷ (RM490m - RM29m) (Based on the trailing twelve months to June 2023).
Thus, Three-A Resources Berhad has an ROCE of 6.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.8%.
Check out our latest analysis for Three-A Resources Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Three-A Resources Berhad's ROCE against it's prior returns. If you'd like to look at how Three-A Resources Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From Three-A Resources Berhad's ROCE Trend?
On the surface, the trend of ROCE at Three-A Resources Berhad doesn't inspire confidence. To be more specific, ROCE has fallen from 12% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
In Conclusion...
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Three-A Resources Berhad. In light of this, the stock has only gained 20% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.
Three-A Resources Berhad does have some risks though, and we've spotted 3 warning signs for Three-A Resources Berhad that you might be interested in.