What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. So when we looked at ARB Berhad (KLSE:ARBB) and its trend of ROCE, we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for ARB Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = RM64m ÷ (RM416m - RM21m) (Based on the trailing twelve months to June 2022).
Therefore, ARB Berhad has an ROCE of 16%. In absolute terms, that's a pretty normal return, and it's somewhat close to the IT industry average of 17%.
View our latest analysis for ARB Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for ARB Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of ARB Berhad, check out these free graphs here.
What Can We Tell From ARB Berhad's ROCE Trend?
We're delighted to see that ARB Berhad is reaping rewards from its investments and is now generating some pre-tax profits. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 16% on its capital. And unsurprisingly, like most companies trying to break into the black, ARB Berhad is utilizing 1,743% more capital than it was five years ago. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
The Bottom Line On ARB Berhad's ROCE
Long story short, we're delighted to see that ARB Berhad's reinvestment activities have paid off and the company is now profitable. And since the stock has fallen 35% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.
ARB Berhad does come with some risks though, we found 5 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...