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. Ergo, when we looked at the ROCE trends at Credit Bureau Asia (SGX:TCU), we liked what we saw.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Credit Bureau Asia is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.32 = S$21m ÷ (S$88m - S$22m) (Based on the trailing twelve months to December 2022).
So, Credit Bureau Asia has an ROCE of 32%. In absolute terms that's a great return and it's even better than the Professional Services industry average of 13%.
Check out our latest analysis for Credit Bureau Asia
In the above chart we have measured Credit Bureau Asia's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Credit Bureau Asia.
What Can We Tell From Credit Bureau Asia's ROCE Trend?
We'd be pretty happy with returns on capital like Credit Bureau Asia. Over the past five years, ROCE has remained relatively flat at around 32% and the business has deployed 125% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If Credit Bureau Asia can keep this up, we'd be very optimistic about its future.
On a side note, Credit Bureau Asia has done well to reduce current liabilities to 25% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.
In Conclusion...
In short, we'd argue Credit Bureau Asia has the makings of a multi-bagger since its been able to compound its capital at very profitable rates of return. Despite the good fundamentals, total returns from the stock have been virtually flat over the last year. For that reason, savvy investors might want to look further into this company in case it's a prime investment.