Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we’d like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in REDtone International Berhad’s (KLSE:REDTONE) returns on capital, so let’s have a look.
What is 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. Analysts use this formula to calculate it for REDtone International Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.26 = RM44m ÷ (RM253m – RM85m) (Based on the trailing twelve months to June 2020).
Therefore, REDtone International Berhad has an ROCE of 26%. That’s a fantastic return and not only that, it outpaces the average of 8.4% earned by companies in a similar industry.
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 REDtone International Berhad’s past further, check out this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
REDtone International Berhad is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 434% whilst employing roughly the same amount of capital. So it’s likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn’t changed considerably. The company is doing well in that sense, and it’s worth investigating what the management team has planned for long term growth prospects.
Our Take On REDtone International Berhad’s ROCE
To sum it up, REDtone International Berhad is collecting higher returns from the same amount of capital, and that’s impressive. And since the stock has fallen 37% over the last five years, there might be an opportunity here. That being the case, research into the company’s current valuation metrics and future prospects seems fitting.
REDtone International Berhad does have some risks though, and we’ve spotted 6 warning signs for REDtone International Berhad that you might be interested in.
If you’d like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.
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This article by Simply Wall St is general in nature. 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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Source: simplywall, 21August 2020