To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 YKGI Holdings Berhad (KLSE:YKGI) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for YKGI Holdings Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = RM13m ÷ (RM238m - RM124m) (Based on the trailing twelve months to June 2022).
Therefore, YKGI Holdings Berhad has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Metals and Mining industry average of 13%.
Check out our latest analysis for YKGI Holdings Berhad
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how YKGI Holdings Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From YKGI Holdings Berhad's ROCE Trend?
We're delighted to see that YKGI Holdings Berhad is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 11% which is no doubt a relief for some early shareholders. In regards to capital employed, YKGI Holdings Berhad is using 46% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.
On a side note, YKGI Holdings Berhad's current liabilities are still rather high at 52% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
In Conclusion...
In the end, YKGI Holdings Berhad has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has fallen 37% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.