To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Ho Hup Construction Company Berhad (KLSE:HOHUP) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What Is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Ho Hup Construction Company Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.053 = RM42m ÷ (RM1.5b - RM735m) (Based on the trailing twelve months to June 2023).
So, Ho Hup Construction Company Berhad has an ROCE of 5.3%. On its own, that's a low figure but it's around the 5.9% average generated by the Construction industry.
Check out our latest analysis for Ho Hup Construction Company 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're interested in investigating Ho Hup Construction Company Berhad's past further, check out this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Ho Hup Construction Company Berhad Tell Us?
On the surface, the trend of ROCE at Ho Hup Construction Company Berhad doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.3% from 12% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 48%, which has impacted the ROCE. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.