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 on that note, MQ Technology Berhad (KLSE:MQTECH) looks quite promising in regards to its trends of return on capital.
Understanding 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 MQ Technology Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.00047 = RM32k ÷ (RM71m - RM3.1m) (Based on the trailing twelve months to December 2022).
Thus, MQ Technology Berhad has an ROCE of 0.05%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 12%.
View our latest analysis for MQ Technology Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for MQ Technology Berhad's ROCE against it's prior returns. If you're interested in investigating MQ Technology Berhad's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For MQ Technology Berhad Tell Us?
MQ Technology Berhad has recently broken into profitability so their prior investments seem to be paying off. The company was generating losses five years ago, but now it's earning 0.05% which is a sight for sore eyes. Not only that, but the company is utilizing 51% more capital than before, but that's to be expected from a company trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 4.4%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
What We Can Learn From MQ Technology Berhad's ROCE
To the delight of most shareholders, MQ Technology Berhad has now broken into profitability. And since the stock has fallen 38% over the last five years, there might be an opportunity here. That being the case, research into the company's current valuation metrics and future prospects seems fitting.