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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. Speaking of which, we noticed some great changes in Hubline Berhad's (KLSE:HUBLINE) returns on capital, so let's have a look.
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. To calculate this metric for Hubline Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.072 = RM17m ÷ (RM388m - RM148m) (Based on the trailing twelve months to September 2023).
Thus, Hubline Berhad has an ROCE of 7.2%. Even though it's in line with the industry average of 7.2%, it's still a low return by itself.
Check out our latest analysis for Hubline Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Hubline Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Hubline Berhad, check out these free graphs here.
What Does the ROCE Trend For Hubline Berhad Tell Us?
The fact that Hubline 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 7.2% on its capital. In addition to that, Hubline Berhad is employing 25% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 38% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.
In Conclusion...
Overall, Hubline 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. Given the stock has declined 33% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.