Yahoo Finance CEKD Berhad (KLSE:CEKD) Might Be Having Difficulty Using Its Capital Effectively
If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out 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. Although, when we looked at CEKD Berhad (KLSE:CEKD), it didn't seem to tick all of these boxes.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on CEKD Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = RM9.1m ÷ (RM75m - RM3.5m) (Based on the trailing twelve months to February 2024).
Therefore, CEKD Berhad has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 7.6% generated by the Machinery industry.
Check out our latest analysis for CEKD Berhad
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how CEKD Berhad has performed in the past in other metrics, you can view this free graph of CEKD Berhad's past earnings, revenue and cash flow.
So How Is CEKD Berhad's ROCE Trending?
When we looked at the ROCE trend at CEKD Berhad, we didn't gain much confidence. Over the last three years, returns on capital have decreased to 13% from 16% three years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
Our Take On CEKD Berhad's ROCE
Bringing it all together, while we're somewhat encouraged by CEKD Berhad's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 5.3% in the last year to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
If you'd like to know more about CEKD Berhad, we've spotted 3 warning signs, and 1 of them can't be ignored.
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.
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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.
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