If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Zecon Berhad (KLSE:ZECON) so let's look a bit deeper.

What Is 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. The formula for this calculation on Zecon Berhad is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.12 = RM66m ÷ (RM1.6b - RM1.0b) (Based on the trailing twelve months to December 2023).

Thus, Zecon Berhad has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 7.7% generated by the Construction industry.

View our latest analysis for Zecon Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Zecon 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 Zecon Berhad.

What Does the ROCE Trend For Zecon Berhad Tell Us?

Zecon Berhad has recently broken into profitability so their prior investments seem to be paying off. About five years ago the company was generating losses but things have turned around because it's now earning 12% on its capital. In addition to that, Zecon Berhad is employing 21% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

On a separate but related note, it's important to know that Zecon Berhad has a current liabilities to total assets ratio of 66%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Zecon Berhad's ROCE

To the delight of most shareholders, Zecon Berhad has now broken into profitability. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 71% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.