If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Harrisons Holdings (Malaysia) Berhad (KLSE:HARISON) looks quite promising in regards to its trends of return on capital.
What Is Return On Capital Employed (ROCE)?
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 Harrisons Holdings (Malaysia) Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = RM101m ÷ (RM887m - RM358m) (Based on the trailing twelve months to June 2023).
So, Harrisons Holdings (Malaysia) Berhad has an ROCE of 19%. In absolute terms, that's a satisfactory return, but compared to the Trade Distributors industry average of 5.2% it's much better.
See our latest analysis for Harrisons Holdings (Malaysia) Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Harrisons Holdings (Malaysia) Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Harrisons Holdings (Malaysia) Berhad, check out these free graphs here.
What Does the ROCE Trend For Harrisons Holdings (Malaysia) Berhad Tell Us?
We like the trends that we're seeing from Harrisons Holdings (Malaysia) Berhad. The data shows that returns on capital have increased substantially over the last five years to 19%. Basically the business is earning more per dollar of capital invested and in addition to that, 67% more capital is being employed now too. So we're very much inspired by what we're seeing at Harrisons Holdings (Malaysia) Berhad thanks to its ability to profitably reinvest capital.
One more thing to note, Harrisons Holdings (Malaysia) Berhad has decreased current liabilities to 40% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.