Gamuda Berhad (KLSE:GAMUDA) returns have hit a wall

What early trends should we look for to identify a stock that could multiply in value over the long term? A common approach is to try to find a company gives back on invested capital (ROCE) that are increasing, in combination with a growing quantity of the invested capital. Simply put, these types of companies are compounding machines, meaning they continually reinvest their earnings at ever-increasing returns. That said, from a first look at Gamuda Berhad (KLSE:GAMUDA) we don’t dwell on the trends in returns, but let’s take a deeper look.

What is return on capital employed (ROCE)?

For those who don’t know, ROCE is a measure of a company’s annual pre-tax profit (its rate of return), relative to the capital employed in the business. The formula for this calculation on Gamuda Berhad is:

Return on Capital Employed = Earnings Before Interest and Taxes (EBIT) ÷ (Total Assets – Current Liabilities)

0.039 = RM741m ÷ (RM25b – RM6.6b) (Based on the last twelve months to January 2024).

Therefore, Gamuda Berhad has a ROCE of 3.9%. Ultimately, that is a low return and it performs below the construction industry average of 7.7%.

Check out our latest analysis for Gamuda Berhad

In the chart above, we compared Gamuda Berhad’s prior ROCE to its past performance, but the future is arguably more important. If you want, you can check out the predictions of the analysts who follow Gamuda Berhad free.

The trend of ROCE

Return on capital has not changed much for Gamuda Berhad in recent years. The company has consistently earned 3.9% over the past five years, and capital employed within the company has increased 39% in that time. This poor ROCE does not inspire confidence at the moment, and with the increase in invested capital, it is clear that the company is not putting resources into high-return investments.

It comes down to

In summary, Gamuda Berhad has simply reinvested capital and generated the same low returns as before. But for long-term shareholders, the stock has given them an incredible 106% return over the past five years, so the market appears to be rosy about the future. Ultimately, if the underlying trends continue, we can’t assume this will be a multi-bagger in the future.

If you would like to continue researching Gamuda Berhad, you may be interested in the 3 warning signs that our analysis has discovered.

For those who like to invest solid companies, take a look at this free list of companies with solid balance sheets and high returns on equity.

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This article from Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only an unbiased methodology and our articles are not intended as financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. We aim to provide you with targeted, long-term analysis based on fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or quality material. Simply Wall St has no positions in the stocks mentioned.