To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. And in light of that, the trends we're seeing at Genetec Technology Berhad's (KLSE:GENETEC) look very promising so lets take a look.
Return On Capital Employed (ROCE): What Is It?
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 Genetec Technology Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.41 = RM77m ÷ (RM303m - RM114m) (Based on the trailing twelve months to June 2022).
So, Genetec Technology Berhad has an ROCE of 41%. In absolute terms that's a great return and it's even better than the Semiconductor industry average of 15%.
View our latest analysis for Genetec Technology Berhad
In the above chart we have measured Genetec Technology Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Genetec Technology Berhad.
The Trend Of ROCE
We like the trends that we're seeing from Genetec Technology Berhad. The data shows that returns on capital have increased substantially over the last five years to 41%. Basically the business is earning more per dollar of capital invested and in addition to that, 142% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 38% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.
The Bottom Line On Genetec Technology Berhad's ROCE
To sum it up, Genetec Technology Berhad has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 1,536% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.