There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Hartalega Holdings Berhad (KLSE:HARTA) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Hartalega Holdings Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0095 = RM46m ÷ (RM5.3b - RM384m) (Based on the trailing twelve months to March 2024).
Therefore, Hartalega Holdings Berhad has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 8.4%.
See our latest analysis for Hartalega Holdings Berhad
Above you can see how the current ROCE for Hartalega Holdings 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 analyst report for Hartalega Holdings Berhad .
How Are Returns Trending?
When we looked at the ROCE trend at Hartalega Holdings Berhad, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 0.9% from 22% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
The Key Takeaway
From the above analysis, we find it rather worrisome that returns on capital and sales for Hartalega Holdings Berhad have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 19% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
One more thing to note, we've identified 1 warning sign with Hartalega Holdings Berhad and understanding this should be part of your investment process.