Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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 investigating HPMT Holdings Berhad (KLSE:HPMT), we don't think it's current trends fit the mold of a multi-bagger.
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. Analysts use this formula to calculate it for HPMT Holdings Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.07 = RM11m ÷ (RM170m - RM14m) (Based on the trailing twelve months to December 2022).
Thus, HPMT Holdings Berhad has an ROCE of 7.0%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 14%.
See our latest analysis for HPMT Holdings Berhad
Above you can see how the current ROCE for HPMT Holdings Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering HPMT Holdings Berhad here for free.
What Does the ROCE Trend For HPMT Holdings Berhad Tell Us?
In terms of HPMT Holdings Berhad's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 22%, but since then they've fallen to 7.0%. However it looks like HPMT Holdings Berhad might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
On a related note, HPMT Holdings Berhad has decreased its current liabilities to 8.5% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
What We Can Learn From HPMT Holdings Berhad's ROCE
In summary, HPMT Holdings Berhad is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And with the stock having returned a mere 20% in the last three years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.