Wednesday, June 29, 2022

EG Industries Berhad (KLSE:EG) Could Be Struggling To Allocate Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we’ll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company’s amount of capital employed. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at EG Industries Berhad (KLSE:EG), it didn’t seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on EG Industries Berhad is:

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

0.042 = RM17m (RM923m – RM514m) (Based on the trailing twelve months to September 2021),

Therefore, EG Industries Berhad has an ROCE of 4.2%. Ultimately, that’s a low return and it under-performs the Consumer Durables industry average of 11%.

View our latest analysis for EG Industries Berhad

KLSE:EG Return on Capital Employed January 27th 2022

Historical performance is a great place to start when researching a stock so above you can see the gauge for EG Industries Berhad’s ROCE against it’s prior returns. If you’re interested in investigating EG Industries Berhad’s past further, check out this free graph of past earnings, revenue and cash flow.

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What Can We Tell From EG Industries Berhad’s ROCE Trend?

On the surface, the trend of ROCE at EG Industries Berhad doesn’t inspire confidence. To be more specific, ROCE has fallen from 12% over the last five years. Meanwhile, the business is utilizing more capital but this hasn’t moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

Another thing to note, EG Industries Berhad has a high ratio of current liabilities to total assets of 56%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it’s not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From EG Industries Berhad’s ROCE

In summary, EG Industries Berhad is reinvesting funds back into the business for growth but unfortunately it looks like sales haven’t increased much just yet. Since the stock has declined 41% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren’t typical of multi-baggers, so if that’s what you’re after, we think you might have more luck elsewhere.

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If you’d like to know more about EG Industries Berhad, we’ve spotted 4 warning signs, and 2 of them make us uncomfortable.

While EG Industries Berhad may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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.

Nation World News Desk
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