Yahoo Finance Returns On Capital Signal Tricky Times Ahead For Elsoft Research Berhad (KLSE:ELSOFT)
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Elsoft Research Berhad (KLSE:ELSOFT) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
What Is Return On Capital Employed (ROCE)?
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. Analysts use this formula to calculate it for Elsoft Research Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.01 = RM1.4m ÷ (RM141m - RM4.4m) (Based on the trailing twelve months to December 2023).
So, Elsoft Research Berhad has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 6.2%.
View our latest analysis for Elsoft Research Berhad
In the above chart we have measured Elsoft Research Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Elsoft Research Berhad .
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Elsoft Research Berhad, we didn't gain much confidence. Around five years ago the returns on capital were 35%, but since then they've fallen to 1.0%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
In Conclusion...
We're a bit apprehensive about Elsoft Research Berhad because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 30% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
If you'd like to know more about Elsoft Research Berhad, we've spotted 5 warning signs, and 1 of them doesn't sit too well with us.
While Elsoft Research 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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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.
