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. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Chuan Huat Resources Berhad (KLSE:CHUAN), we don't think it's current trends fit the mold of a multi-bagger.
What Is 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 Chuan Huat Resources Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.02 = RM7.8m ÷ (RM654m - RM264m) (Based on the trailing twelve months to June 2023).
So, Chuan Huat Resources Berhad has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 5.2%.
See our latest analysis for Chuan Huat Resources Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Chuan Huat Resources Berhad's ROCE against it's prior returns. If you're interested in investigating Chuan Huat Resources Berhad's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Chuan Huat Resources Berhad Tell Us?
When we looked at the ROCE trend at Chuan Huat Resources Berhad, we didn't gain much confidence. To be more specific, ROCE has fallen from 3.8% over the last five years. However it looks like Chuan Huat Resources Berhad might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
Another thing to note, Chuan Huat Resources Berhad has a high ratio of current liabilities to total assets of 40%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
What We Can Learn From Chuan Huat Resources Berhad's ROCE
Bringing it all together, while we're somewhat encouraged by Chuan Huat Resources Berhad's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 41% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.