To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Asiatic Group (Holdings) (Catalist:5CR), 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. To calculate this metric for Asiatic Group (Holdings), this is the formula:

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

0.046 = S$1.2m ÷ (S$51m - S$24m) (Based on the trailing twelve months to March 2023).

So, Asiatic Group (Holdings) has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Renewable Energy industry average of 7.2%.

Check out our latest analysis for Asiatic Group (Holdings)

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

The Trend Of ROCE

Over the past five years, Asiatic Group (Holdings)'s ROCE has remained relatively flat while the business is using 59% less capital than before. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 47% of total assets, this reported ROCE would probably be less than4.6% because total capital employed would be higher.The 4.6% ROCE could be even lower if current liabilities weren't 47% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.