If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Poh Kong Holdings Berhad's (KLSE:POHKONG) returns on capital, so let's have a look.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Poh Kong Holdings Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = RM123m ÷ (RM883m - RM145m) (Based on the trailing twelve months to July 2022).
Thus, Poh Kong Holdings Berhad has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Luxury industry average of 6.8% it's much better.
View our latest analysis for Poh Kong Holdings Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Poh Kong Holdings Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Poh Kong Holdings Berhad, check out these free graphs here.
The Trend Of ROCE
Poh Kong Holdings Berhad is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 17%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 27%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
What We Can Learn From Poh Kong Holdings Berhad's ROCE
In summary, it's great to see that Poh Kong Holdings Berhad can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Considering the stock has delivered 16% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.