If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. However, after investigating JF Technology Berhad (KLSE:JFTECH), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for JF Technology Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.075 = RM10m ÷ (RM143m - RM5.8m) (Based on the trailing twelve months to March 2023).
Thus, JF Technology Berhad has an ROCE of 7.5%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 12%.
View our latest analysis for JF Technology 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 JF Technology Berhad's past further, check out this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
In terms of JF Technology Berhad's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 7.5% from 18% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
Our Take On JF Technology Berhad's ROCE
To conclude, we've found that JF Technology Berhad is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 380% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
JF Technology Berhad could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.