If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Astino Berhad (KLSE:ASTINO) and its ROCE trend, we weren't exactly thrilled.
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 Astino Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.071 = RM38m ÷ (RM571m - RM38m) (Based on the trailing twelve months to January 2023).
So, Astino Berhad has an ROCE of 7.1%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.1%.
Check out our latest analysis for Astino Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Astino Berhad's ROCE against it's prior returns. If you're interested in investigating Astino Berhad's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Astino Berhad Tell Us?
When we looked at the ROCE trend at Astino Berhad, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 7.1% from 13% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
On a side note, Astino Berhad has done well to pay down its current liabilities to 6.7% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
In Conclusion...
While returns have fallen for Astino Berhad in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These trends are starting to be recognized by investors since the stock has delivered a 20% gain to shareholders who've held over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.