Unveiling the Troubling Returns on Capital at CPE Technology Berhad (KLSE: CPETECH): What Investors Need to Know

To spot the next big investment, keep an eye on a couple of important trends. First, the company should show a rising return on capital employed (ROCE). Second, it should be increasing its capital employed. Both signals often indicate a strong business model that’s good at reinvesting profits. However, when we examined CPE Technology Berhad (KLSE:CPETECH), we found it doesn’t quite meet these criteria.

If you’re unfamiliar with ROCE, it measures how well a company generates profit from its capital. For CPE Technology Berhad, the formula looks like this:

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

0.03 = RM9.7m ÷ (RM343m – RM20m) (As of September 2024).

This means that CPE Technology Berhad’s ROCE is 3.0%. Unfortunately, this is quite low, especially compared to the Machinery industry average of 8.3%.

When looking at past performance, CPE Technology Berhad’s ROCE trend is concerning. It has dropped from 14% over the last five years. On top of that, revenue has also fallen, despite the fact that more capital is employed. This might suggest the company is losing its edge in the market. In simple terms, it’s getting “less bang for its buck.”

There is a positive note: CPE Technology Berhad has succeeded in reducing its current liabilities to 5.8% of total assets. This change can lower certain risks as the company relies less on short-term creditors. However, this can also mean the company is using its own funds more, potentially affecting its ROCE efficiency.

Overall, it’s disheartening to see that both ROCE and sales have declined for CPE Technology Berhad, even while it employs more capital than five years ago. Investors have seen little to no growth in their investments over the past year. If these troubling trends don’t improve, it may be wise for investors to consider other options.

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