To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think George Kent (Malaysia) Berhad (KLSE:GKENT) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 George Kent (Malaysia) Berhad is:

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

0.021 = RM14m ÷ (RM800m - RM130m) (Based on the trailing twelve months to June 2023).

Therefore, George Kent (Malaysia) Berhad has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 5.9%.

Check out our latest analysis for George Kent (Malaysia) Berhad

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how George Kent (Malaysia) Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is George Kent (Malaysia) Berhad's ROCE Trending?

When we looked at the ROCE trend at George Kent (Malaysia) Berhad, we didn't gain much confidence. To be more specific, ROCE has fallen from 37% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, George Kent (Malaysia) Berhad has done well to pay down its current liabilities to 16% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.