If you're looking for a multi-bagger, there's a few things to keep an eye out for. 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. So on that note, Rhong Khen International Berhad (KLSE:RKI) looks quite promising in regards to its trends of return on capital.
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. The formula for this calculation on Rhong Khen International Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.044 = RM31m ÷ (RM813m - RM100m) (Based on the trailing twelve months to June 2023).
Thus, Rhong Khen International Berhad has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 11%.
See our latest analysis for Rhong Khen International Berhad
In the above chart we have measured Rhong Khen International Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Rhong Khen International Berhad.
What The Trend Of ROCE Can Tell Us
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 4.4%. 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.
One more thing to note, Rhong Khen International Berhad has decreased current liabilities to 12% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.
In Conclusion...
All in all, it's terrific to see that Rhong Khen International Berhad is reaping the rewards from prior investments and is growing its capital base. Astute investors may have an opportunity here because the stock has declined 11% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.