What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Hong Seng Consolidated Berhad's (KLSE:HONGSENG) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Hong Seng Consolidated Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.037 = RM15m ÷ (RM419m - RM22m) (Based on the trailing twelve months to December 2022).
Thus, Hong Seng Consolidated Berhad has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Healthcare industry average of 8.9%.
View our latest analysis for Hong Seng Consolidated Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Hong Seng Consolidated Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Hong Seng Consolidated Berhad, check out these free graphs here.
So How Is Hong Seng Consolidated Berhad's ROCE Trending?
The fact that Hong Seng Consolidated Berhad is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 3.7% on its capital. Not only that, but the company is utilizing 644% more capital than before, but that's to be expected from a company trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
On a related note, the company's ratio of current liabilities to total assets has decreased to 5.2%, which basically reduces it's funding from the likes of short-term creditors or suppliers. 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.