What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 briefly looking over the numbers, we don't think Hap Seng Consolidated Berhad (KLSE:HAPSENG) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Hap Seng Consolidated Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.065 = RM921m ÷ (RM19b - RM4.7b) (Based on the trailing twelve months to June 2024).
So, Hap Seng Consolidated Berhad has an ROCE of 6.5%. Even though it's in line with the industry average of 7.2%, it's still a low return by itself.
View our latest analysis for Hap Seng Consolidated Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Hap Seng Consolidated Berhad's ROCE against it's prior returns. If you'd like to look at how Hap Seng Consolidated Berhad has performed in the past in other metrics, you can view this free graph of Hap Seng Consolidated Berhad's past earnings, revenue and cash flow.
What Does the ROCE Trend For Hap Seng Consolidated Berhad Tell Us?
Over the past five years, Hap Seng Consolidated Berhad's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So don't be surprised if Hap Seng Consolidated Berhad doesn't end up being a multi-bagger in a few years time.
What We Can Learn From Hap Seng Consolidated Berhad's ROCE
In a nutshell, Hap Seng Consolidated Berhad has been trudging along with the same returns from the same amount of capital over the last five years. And investors appear hesitant that the trends will pick up because the stock has fallen 48% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.