If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Hibiscus Petroleum Berhad (KLSE:HIBISCS) looks great, so lets see what the trend can tell us.
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. To calculate this metric for Hibiscus Petroleum Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.22 = RM1.1b ÷ (RM7.7b - RM2.5b) (Based on the trailing twelve months to December 2024).
So, Hibiscus Petroleum Berhad has an ROCE of 22%. In absolute terms that's a very respectable return and compared to the Oil and Gas industry average of 20% it's pretty much on par.
See our latest analysis for Hibiscus Petroleum Berhad
Above you can see how the current ROCE for Hibiscus Petroleum Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Hibiscus Petroleum Berhad for free.
The Trend Of ROCE
The trends we've noticed at Hibiscus Petroleum Berhad are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 22%. The amount of capital employed has increased too, by 146%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 33% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.
What We Can Learn From Hibiscus Petroleum Berhad's ROCE
To sum it up, Hibiscus Petroleum Berhad has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 39% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.