To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. So when we looked at Microlink Solutions Berhad (KLSE:MICROLN) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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. To calculate this metric for Microlink Solutions Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.049 = RM12m ÷ (RM362m - RM127m) (Based on the trailing twelve months to December 2023).
So, Microlink Solutions Berhad has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Software industry average of 9.0%.
Check out our latest analysis for Microlink Solutions Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Microlink Solutions Berhad's ROCE against it's prior returns. If you're interested in investigating Microlink Solutions Berhad's past further, check out this free graph covering Microlink Solutions Berhad's past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
The fact that Microlink Solutions Berhad is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 4.9% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Microlink Solutions Berhad is utilizing 288% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
On a related note, the company's ratio of current liabilities to total assets has decreased to 35%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
In Conclusion...
Long story short, we're delighted to see that Microlink Solutions Berhad's reinvestment activities have paid off and the company is now profitable. And a remarkable 221% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.