Oiltek International (Catalist:HQU) Knows How To Allocate Capital Effectively

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, the ROCE of Oiltek International (Catalist:HQU) looks great, so lets see what the trend can tell us.

Understanding 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 Oiltek International:

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

0.29 = RM16m ÷ (RM158m – RM103m) (Based on the trailing twelve months to June 2023).

Therefore, Oiltek International has an ROCE of 29%. In absolute terms that’s a great return and it’s even better than the Construction industry average of 5.1%.

Check out our latest analysis for Oiltek International



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

How Are Returns Trending?

Investors would be pleased with what’s happening at Oiltek International. Over the last four years, returns on capital employed have risen substantially to 29%. Basically the business is earning more per dollar of capital invested and in addition to that, 33% more capital is being employed now too. This can indicate that there’s plenty of opportunities to invest capital internally and at ever higher rates, a combination that’s common among multi-baggers.

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On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 65% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that’s pretty high.

The Bottom Line

All in all, it’s terrific to see that Oiltek International is reaping the rewards from prior investments and is growing its capital base. Considering the stock has delivered 5.5% to its stockholders over the last year, it may be fair to think that investors aren’t fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

If you’d like to know about the risks facing Oiltek International, we’ve discovered 3 warning signs that you should be aware of.

High returns are a key ingredient to strong performance, so check out our free list ofstocks 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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