Did you know that there are financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we would like to see a company invest more capital in their business and ideally the returns from that capital also increase. Simply put, these types of businesses are slot machines, meaning they continually reinvest their profits at ever-higher rates of return. Therefore, when we briefly examined Berhad’s 3-A Resources (KLSE:3A) ROCE trend, we were pretty happy with what we saw.
What is return on capital employed (ROCE)?
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. To calculate this metric for Three-A Resources Berhad, here is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.14 = RM59m ÷ (RM461m – RM35m) (Based on the last twelve months to September 2021).
So, Three-A Resources Berhad has a ROCE of 14%. In absolute terms, that’s a decent return, but compared to the food industry average of 8.6%, that’s much better.
See our latest analysis for Three-A Resources Berhad
Above, you can see how Three-A Resources Berhad’s current ROCE compares to its past returns on capital, but you can’t say anything about the past. If you’re interested, you can check out analyst forecasts in our free analyst forecast report for the company.
What is the return trend?
The ROCE trend isn’t showing much, but overall returns are decent. The company has consistently gained 14% over the past five years and the capital employed within the company has increased by 44% over this period. Since 14% is a moderate ROCE, it’s good to see that a company can continue to reinvest at these decent rates of return. Stable returns in this stage can be unexciting, but if they can be sustained over the long term, they often offer handsome rewards to shareholders.
The Basics of Berhad’s ROCE for Three-A Resources
The main takeaway is that Three-A Resources Berhad has a proven ability to continuously reinvest at respectable rates of return. However, over the past five years, the stock has only offered a 25% return to shareholders who have held it during that time. So, to determine if Three-A Resources Berhad is a multi-bagger going forward, we suggest digging into other company fundamentals.
Finally we found 2 warning signs for Three-A Resources Berhad (1 is significant) which you should be aware of.
If you want to look for strong companies with excellent earnings, check out this free list of companies with strong balance sheets and impressive returns on equity.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.