If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. With that in mind, we've noticed some promising trends at Quality Concrete Holdings Berhad (KLSE:QUALITY) so let's look a bit deeper.
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 Quality Concrete Holdings Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.088 = RM11m ÷ (RM269m - RM138m) (Based on the trailing twelve months to July 2022).
Thus, Quality Concrete Holdings Berhad has an ROCE of 8.8%. In absolute terms, that's a low return, but it's much better than the Basic Materials industry average of 2.4%.
Check out our latest analysis for Quality Concrete Holdings Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Quality Concrete Holdings Berhad's ROCE against it's prior returns. If you're interested in investigating Quality Concrete Holdings Berhad's past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Quality Concrete Holdings Berhad's ROCE Trending?
We're delighted to see that Quality Concrete Holdings Berhad is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 8.8%, which is always encouraging. 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. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
On a side note, Quality Concrete Holdings Berhad's current liabilities are still rather high at 51% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.