To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. However, after briefly looking over the numbers, we don't think Asia File Corporation Bhd (KLSE:ASIAFLE) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. To calculate this metric for Asia File Corporation Bhd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.059 = RM47m ÷ (RM838m - RM33m) (Based on the trailing twelve months to December 2023).
So, Asia File Corporation Bhd has an ROCE of 5.9%. Even though it's in line with the industry average of 5.9%, it's still a low return by itself.
Check out our latest analysis for Asia File Corporation Bhd
Above you can see how the current ROCE for Asia File Corporation Bhd 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 Asia File Corporation Bhd .
What Does the ROCE Trend For Asia File Corporation Bhd Tell Us?
The returns on capital haven't changed much for Asia File Corporation Bhd in recent years. Over the past five years, ROCE has remained relatively flat at around 5.9% and the business has deployed 32% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
The Key Takeaway
In summary, Asia File Corporation Bhd has simply been reinvesting capital and generating the same low rate of return as before. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
Like most companies, Asia File Corporation Bhd does come with some risks, and we've found 2 warning signs that you should be aware of.