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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Riverview Rubber Estates Berhad (KLSE:RVIEW), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on Riverview Rubber Estates Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.073 = RM31m ÷ (RM425m - RM5.5m) (Based on the trailing twelve months to September 2022).
So, Riverview Rubber Estates Berhad has an ROCE of 7.3%. In absolute terms, that's a low return and it also under-performs the Food industry average of 11%.
View our latest analysis for Riverview Rubber Estates Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Riverview Rubber Estates Berhad's ROCE against it's prior returns. If you're interested in investigating Riverview Rubber Estates Berhad's past further, check out this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
Things have been pretty stable at Riverview Rubber Estates Berhad, with its capital employed and returns on that capital staying somewhat the same for the last five years. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Riverview Rubber Estates Berhad to be a multi-bagger going forward.
What We Can Learn From Riverview Rubber Estates Berhad's ROCE
In a nutshell, Riverview Rubber Estates Berhad has been trudging along with the same returns from the same amount of capital over the last five years. And investors may be recognizing these trends since the stock has only returned a total of 17% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
One more thing: We've identified 3 warning signs with Riverview Rubber Estates Berhad (at least 1 which is a bit unpleasant) , and understanding them would certainly be useful.