If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. 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 Cypark Resources Berhad (KLSE:CYPARK), we don't think it's current trends fit the mold of a multi-bagger.
Understanding 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. Analysts use this formula to calculate it for Cypark Resources Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.035 = RM88m ÷ (RM2.9b - RM417m) (Based on the trailing twelve months to July 2022).
Thus, Cypark Resources Berhad has an ROCE of 3.5%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 10%.
Check out our latest analysis for Cypark Resources Berhad
Above you can see how the current ROCE for Cypark Resources Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From Cypark Resources Berhad's ROCE Trend?
In terms of Cypark Resources Berhad's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 7.4%, but since then they've fallen to 3.5%. However it looks like Cypark 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.
Our Take On Cypark Resources Berhad's ROCE
Bringing it all together, while we're somewhat encouraged by Cypark Resources Berhad's reinvestment in its own business, we're aware that returns are shrinking. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 74% in the last five years. Therefore based on the analysis done in this article, we don't think Cypark Resources Berhad has the makings of a multi-bagger.
Cypark Resources Berhad does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.