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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating N2N Connect Berhad (KLSE:N2N), we don't think it's current trends fit the mold of a multi-bagger.
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. Analysts use this formula to calculate it for N2N Connect Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.068 = RM19m ÷ (RM297m - RM22m) (Based on the trailing twelve months to June 2022).
So, N2N Connect Berhad has an ROCE of 6.8%. Ultimately, that's a low return and it under-performs the Software industry average of 14%.
See our latest analysis for N2N Connect Berhad
Above you can see how the current ROCE for N2N Connect Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What Can We Tell From N2N Connect Berhad's ROCE Trend?
There hasn't been much to report for N2N Connect Berhad's returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect N2N Connect Berhad to be a multi-bagger going forward. This probably explains why N2N Connect Berhad is paying out 45% of its income to shareholders in the form of dividends. Unless businesses have highly compelling growth opportunities, they'll typically return some money to shareholders.
Our Take On N2N Connect Berhad's ROCE
In a nutshell, N2N Connect Berhad has been trudging along with the same returns from the same amount of capital over the last five years. And in the last five years, the stock has given away 52% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.