Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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. So when we looked at Harbour-Link Group Berhad (KLSE:HARBOUR) and its trend of ROCE, we really liked what we saw.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Harbour-Link Group Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = RM124m ÷ (RM1.1b - RM194m) (Based on the trailing twelve months to December 2023).
Therefore, Harbour-Link Group Berhad has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Shipping industry average of 5.0% it's much better.
See our latest analysis for Harbour-Link Group 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 Harbour-Link Group Berhad has performed in the past in other metrics, you can view this free graph of Harbour-Link Group Berhad's past earnings, revenue and cash flow.
What Can We Tell From Harbour-Link Group Berhad's ROCE Trend?
We like the trends that we're seeing from Harbour-Link Group Berhad. Over the last five years, returns on capital employed have risen substantially to 13%. Basically the business is earning more per dollar of capital invested and in addition to that, 80% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
What We Can Learn From Harbour-Link Group Berhad's ROCE
In summary, it's great to see that Harbour-Link Group Berhad can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. 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.