To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Speaking of which, we noticed some great changes in Ho Wah Genting Berhad's (KLSE:HWGB) returns on capital, so let's have a look.

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 Ho Wah Genting Berhad is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.053 = RM5.4m ÷ (RM132m - RM31m) (Based on the trailing twelve months to December 2023).

Thus, Ho Wah Genting Berhad has an ROCE of 5.3%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 10%.

See our latest analysis for Ho Wah Genting Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Ho Wah Genting Berhad's ROCE against it's prior returns. If you're interested in investigating Ho Wah Genting Berhad's past further, check out this free graph covering Ho Wah Genting Berhad's past earnings, revenue and cash flow.

What Can We Tell From Ho Wah Genting Berhad's ROCE Trend?

Ho Wah Genting Berhad has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 5.3% which is a sight for sore eyes. In addition to that, Ho Wah Genting Berhad is employing 125% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 23%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Key Takeaway

Long story short, we're delighted to see that Ho Wah Genting Berhad's reinvestment activities have paid off and the company is now profitable. Astute investors may have an opportunity here because the stock has declined 31% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.