There are a few key trends to look for if we want to identify the next multi-bagger. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, T7 Global Berhad (KLSE:T7GLOBAL) looks quite promising in regards to its trends of return on capital.
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 T7 Global Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.067 = RM49m ÷ (RM1.1b - RM355m) (Based on the trailing twelve months to March 2023).
So, T7 Global Berhad has an ROCE of 6.7%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 8.6%.
View our latest analysis for T7 Global Berhad
Above you can see how the current ROCE for T7 Global 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 T7 Global Berhad here for free.
How Are Returns Trending?
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 6.7%. Basically the business is earning more per dollar of capital invested and in addition to that, 355% more capital is being employed now too. So we're very much inspired by what we're seeing at T7 Global Berhad thanks to its ability to profitably reinvest capital.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 32%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.
The Bottom Line
In summary, it's great to see that T7 Global Berhad can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 5.0% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.