To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. So when we looked at New Hoong Fatt Holdings Berhad (KLSE:NHFATT) and its trend of ROCE, we really liked what we saw.
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 New Hoong Fatt Holdings Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.068 = RM43m ÷ (RM648m - RM22m) (Based on the trailing twelve months to September 2024).
Thus, New Hoong Fatt Holdings Berhad has an ROCE of 6.8%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 15%.
Check out our latest analysis for New Hoong Fatt Holdings Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for New Hoong Fatt Holdings Berhad's ROCE against it's prior returns. If you're interested in investigating New Hoong Fatt Holdings Berhad's past further, check out this free graph covering New Hoong Fatt Holdings Berhad's past earnings, revenue and cash flow.
The Trend Of ROCE
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 6.8%. Basically the business is earning more per dollar of capital invested and in addition to that, 23% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
What We Can Learn From New Hoong Fatt Holdings Berhad's ROCE
To sum it up, New Hoong Fatt Holdings Berhad has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 76% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.