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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Harrisons Holdings (Malaysia) Berhad (KLSE:HARISON) so let's look a bit deeper.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Harrisons Holdings (Malaysia) Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.19 = RM98m ÷ (RM895m - RM383m) (Based on the trailing twelve months to March 2023).
Thus, Harrisons Holdings (Malaysia) Berhad has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 8.3% generated by the Trade Distributors industry.
Check out our latest analysis for Harrisons Holdings (Malaysia) Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Harrisons Holdings (Malaysia) Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Harrisons Holdings (Malaysia) Berhad, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
Investors would be pleased with what's happening at Harrisons Holdings (Malaysia) Berhad. Over the last five years, returns on capital employed have risen substantially to 19%. 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 64%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 43%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.