Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Gamuda Berhad (KLSE:GAMUDA), it didn't seem to tick all of these boxes.
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. The formula for this calculation on Gamuda Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.034 = RM670m ÷ (RM27b - RM7.6b) (Based on the trailing twelve months to October 2024).
Thus, Gamuda Berhad has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 11%.
View our latest analysis for Gamuda Berhad
Above you can see how the current ROCE for Gamuda Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Gamuda Berhad for free.
In terms of Gamuda Berhad's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 4.8%, but since then they've fallen to 3.4%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
In summary, despite lower returns in the short term, we're encouraged to see that Gamuda Berhad is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 165% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.