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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Bina Darulaman Berhad (KLSE:BDB) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
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. The formula for this calculation on Bina Darulaman Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.027 = RM15m ÷ (RM717m - RM184m) (Based on the trailing twelve months to December 2022).
Thus, Bina Darulaman Berhad has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Construction industry average of 4.9%.
Check out our latest analysis for Bina Darulaman Berhad
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Bina Darulaman Berhad, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
Shareholders will be relieved that Bina Darulaman Berhad has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 2.7% on its capital. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.
Our Take On Bina Darulaman Berhad's ROCE
To sum it up, Bina Darulaman Berhad is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has fallen 29% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.
One more thing, we've spotted 1 warning sign facing Bina Darulaman Berhad that you might find interesting.