There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 when we looked at Sunzen Biotech Berhad (KLSE:SUNZEN) and its trend of ROCE, we really liked what we saw.
What Is 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 Sunzen Biotech Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.082 = RM12m ÷ (RM159m - RM9.9m) (Based on the trailing twelve months to December 2023).
Thus, Sunzen Biotech Berhad has an ROCE of 8.2%. In absolute terms, that's a low return and it also under-performs the Personal Products industry average of 11%.
Check out our latest analysis for Sunzen Biotech Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Sunzen Biotech Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Sunzen Biotech Berhad.
So How Is Sunzen Biotech Berhad's ROCE Trending?
Sunzen Biotech Berhad has recently broken into profitability so their prior investments seem to be paying off. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 8.2% on its capital. In addition to that, Sunzen Biotech Berhad is employing 21% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
One more thing to note, Sunzen Biotech Berhad has decreased current liabilities to 6.3% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
The Key Takeaway
Overall, Sunzen Biotech Berhad gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.