If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Koh Brothers Eco Engineering (Catalist:5HV) 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. Analysts use this formula to calculate it for Koh Brothers Eco Engineering:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.026 = S$4.3m ÷ (S$289m - S$121m) (Based on the trailing twelve months to December 2022).
Therefore, Koh Brothers Eco Engineering has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 3.8%.
View our latest analysis for Koh Brothers Eco Engineering
Historical performance is a great place to start when researching a stock so above you can see the gauge for Koh Brothers Eco Engineering's ROCE against it's prior returns. If you're interested in investigating Koh Brothers Eco Engineering's past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
When we looked at the ROCE trend at Koh Brothers Eco Engineering, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.6% from 13% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
On a side note, Koh Brothers Eco Engineering has done well to pay down its current liabilities to 42% of total assets. That could partly explain why the ROCE has dropped. 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. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.