GE-Shen Corporation Berhad (KLSE:GESHEN) Could Be Struggling To Allocate Capital
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Having said that, from a first glance at GE-Shen Corporation Berhad (KLSE:GESHEN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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. To calculate this metric for GE-Shen Corporation Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = RM18m ÷ (RM275m - RM92m) (Based on the trailing twelve months to September 2022).
So, GE-Shen Corporation Berhad has an ROCE of 10%. That's a relatively normal return on capital, and it's around the 11% generated by the Packaging industry.
See our latest analysis for GE-Shen Corporation 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're interested in investigating GE-Shen Corporation Berhad's past further, check out this free graph of past earnings, revenue and cash flow.
So How Is GE-Shen Corporation Berhad's ROCE Trending?
On the surface, the trend of ROCE at GE-Shen Corporation Berhad doesn't inspire confidence. Over the last five years, returns on capital have decreased to 10% from 17% five years ago. However it looks like GE-Shen Corporation Berhad might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
The Bottom Line On GE-Shen Corporation Berhad's ROCE
Bringing it all together, while we're somewhat encouraged by GE-Shen Corporation Berhad's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 38% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
One more thing, we've spotted 3 warning signs facing GE-Shen Corporation Berhad that you might find interesting.
While GE-Shen Corporation 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.
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