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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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think MHC Plantations Bhd (KLSE:MHC) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on MHC Plantations Bhd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.057 = RM38m ÷ (RM726m - RM59m) (Based on the trailing twelve months to June 2023).
So, MHC Plantations Bhd has an ROCE of 5.7%. Even though it's in line with the industry average of 6.4%, it's still a low return by itself.
See our latest analysis for MHC Plantations Bhd
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 want to delve into the historical earnings, revenue and cash flow of MHC Plantations Bhd, check out these free graphs here.
How Are Returns Trending?
Things have been pretty stable at MHC Plantations Bhd, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. So unless we see a substantial change at MHC Plantations Bhd in terms of ROCE and additional investments being made, we wouldn't hold our breath on it being a multi-bagger.
In Conclusion...
In a nutshell, MHC Plantations Bhd has been trudging along with the same returns from the same amount of capital over the last five years. Since the stock has gained an impressive 79% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
On a separate note, we've found 3 warning signs for MHC Plantations Bhd you'll probably want to know about.