Returns On Capital Are Showing Encouraging Signs At E.A. Technique (M) Berhad (KLSE:EATECH)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at E.A. Technique (M) Berhad (KLSE:EATECH) so let's look a bit deeper.

Understanding 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 E.A. Technique (M) Berhad:

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

0.10 = RM16m ÷ (RM531m - RM369m) (Based on the trailing twelve months to December 2022).

Therefore, E.A. Technique (M) Berhad has an ROCE of 10.0%. In absolute terms, that's a low return and it also under-performs the Oil and Gas industry average of 14%.

See our latest analysis for E.A. Technique (M) Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for E.A. Technique (M) Berhad's ROCE against it's prior returns. If you're interested in investigating E.A. Technique (M) Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Like most people, we're pleased that E.A. Technique (M) Berhad is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 10.0% which is no doubt a relief for some early shareholders. Additionally, the business is utilizing 64% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 70% of the business, which is more than it was five years ago. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

The Bottom Line On E.A. Technique (M) Berhad's ROCE

In summary, it's great to see that E.A. Technique (M) Berhad has been able to turn things around and earn higher returns on lower amounts of capital. And since the stock has fallen 60% 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.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for E.A. Technique (M) Berhad (of which 2 are potentially serious!) that you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here