To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Teck Guan Perdana Berhad (KLSE:TECGUAN) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Teck Guan Perdana Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.083 = RM11m ÷ (RM180m - RM44m) (Based on the trailing twelve months to October 2024).
Thus, Teck Guan Perdana Berhad has an ROCE of 8.3%. Even though it's in line with the industry average of 8.4%, it's still a low return by itself.
View our latest analysis for Teck Guan Perdana Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Teck Guan Perdana Berhad's ROCE against it's prior returns. If you'd like to look at how Teck Guan Perdana Berhad has performed in the past in other metrics, you can view this free graph of Teck Guan Perdana Berhad's past earnings, revenue and cash flow.
So How Is Teck Guan Perdana Berhad's ROCE Trending?
In terms of Teck Guan Perdana Berhad's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 8.3% from 25% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
On a related note, Teck Guan Perdana Berhad has decreased its current liabilities to 24% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.