In This Article:
To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. So when we looked at QAF (SGX:Q01) and its trend of ROCE, we really liked what we saw.
What Is 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. To calculate this metric for QAF, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.049 = S$25m ÷ (S$632m - S$114m) (Based on the trailing twelve months to June 2023).
Thus, QAF has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Food industry average of 12%.
Check out our latest analysis for QAF
Historical performance is a great place to start when researching a stock so above you can see the gauge for QAF's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of QAF, check out these free graphs here.
How Are Returns Trending?
While there are companies with higher returns on capital out there, we still find the trend at QAF promising. The figures show that over the last five years, ROCE has grown 141% whilst employing roughly the same amount of capital. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
In Conclusion...
As discussed above, QAF appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And with a respectable 54% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if QAF can keep these trends up, it could have a bright future ahead.
One more thing: We've identified 3 warning signs with QAF (at least 1 which is significant) , and understanding them would certainly be useful.