To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. So when we looked at Success Transformer Corporation Berhad (KLSE:SUCCESS) and its trend of ROCE, we really liked what we saw.
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 Success Transformer Corporation Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.07 = RM29m ÷ (RM444m - RM30m) (Based on the trailing twelve months to September 2023).
Therefore, Success Transformer Corporation Berhad has an ROCE of 7.0%. Ultimately, that's a low return and it under-performs the Electrical industry average of 11%.
View our latest analysis for Success Transformer Corporation Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Success Transformer Corporation Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Success Transformer Corporation Berhad, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
Success Transformer Corporation Berhad's ROCE growth is quite impressive. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 110% in that same time. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
One more thing to note, Success Transformer Corporation Berhad has decreased current liabilities to 6.8% 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.
The Bottom Line
As discussed above, Success Transformer Corporation Berhad appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. 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.