Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 Oriental Food Industries Holdings Berhad (KLSE:OFI) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Oriental Food Industries Holdings Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.094 = RM23m ÷ (RM283m - RM33m) (Based on the trailing twelve months to June 2023).
Thus, Oriental Food Industries Holdings Berhad has an ROCE of 9.4%. On its own that's a low return, but compared to the average of 6.4% generated by the Food industry, it's much better.
Check out our latest analysis for Oriental Food Industries Holdings Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Oriental Food Industries Holdings Berhad's ROCE against it's prior returns. If you're interested in investigating Oriental Food Industries Holdings Berhad's past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From Oriental Food Industries Holdings Berhad's ROCE Trend?
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 9.4%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 21%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
The Bottom Line
All in all, it's terrific to see that Oriental Food Industries Holdings Berhad is reaping the rewards from prior investments and is growing its capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. In light of that, we think it's worth looking further into this stock because if Oriental Food Industries Holdings Berhad can keep these trends up, it could have a bright future ahead.