To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Focus Dynamics Group Berhad (KLSE:FOCUS) looks quite promising in regards to its trends of return on capital.
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 Focus Dynamics Group Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.088 = RM17m ÷ (RM243m - RM55m) (Based on the trailing twelve months to June 2022).
Therefore, Focus Dynamics Group Berhad has an ROCE of 8.8%. In absolute terms, that's a low return, but it's much better than the Hospitality industry average of 5.3%.
Check out our latest analysis for Focus Dynamics Group 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'd like to look at how Focus Dynamics Group Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
The fact that Focus Dynamics Group Berhad is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 8.8% on its capital. Not only that, but the company is utilizing 527% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
The Bottom Line
Overall, Focus Dynamics Group Berhad gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And since the stock has dived 80% over the last five years, there may be other factors affecting the company's prospects. Still, it's worth doing some further research to see if the trends will continue into the future.
If you want to know some of the risks facing Focus Dynamics Group Berhad we've found 3 warning signs (2 are a bit concerning!) that you should be aware of before investing here.