What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Kumpulan H & L High-Tech Berhad (KLSE:HIGHTEC) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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. Analysts use this formula to calculate it for Kumpulan H & L High-Tech Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.049 = RM8.3m ÷ (RM173m - RM4.7m) (Based on the trailing twelve months to October 2023).
Therefore, Kumpulan H & L High-Tech Berhad has an ROCE of 4.9%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 10.0%.
Check out our latest analysis for Kumpulan H & L High-Tech Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Kumpulan H & L High-Tech Berhad's ROCE against it's prior returns. If you're interested in investigating Kumpulan H & L High-Tech Berhad's past further, check out this free graph covering Kumpulan H & L High-Tech Berhad's past earnings, revenue and cash flow.
What Can We Tell From Kumpulan H & L High-Tech Berhad's ROCE Trend?
The returns on capital haven't changed much for Kumpulan H & L High-Tech Berhad in recent years. The company has employed 66% more capital in the last five years, and the returns on that capital have remained stable at 4.9%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
What We Can Learn From Kumpulan H & L High-Tech Berhad's ROCE
As we've seen above, Kumpulan H & L High-Tech Berhad's returns on capital haven't increased but it is reinvesting in the business. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 142% gain to shareholders who have held over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.