Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at Microlink Solutions Berhad (KLSE:MICROLN) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
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. The formula for this calculation on Microlink Solutions Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = RM30m ÷ (RM325m - RM85m) (Based on the trailing twelve months to June 2023).
So, Microlink Solutions Berhad has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 9.0% generated by the Software industry.
See our latest analysis for Microlink Solutions Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Microlink Solutions Berhad's ROCE against it's prior returns. If you're interested in investigating Microlink Solutions Berhad's past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
We're delighted to see that Microlink Solutions Berhad is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 12% which is a sight for sore eyes. Not only that, but the company is utilizing 287% more capital than before, but that's to be expected from a company 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.
One more thing to note, Microlink Solutions Berhad has decreased current liabilities to 26% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.
What We Can Learn From Microlink Solutions Berhad's ROCE
To the delight of most shareholders, Microlink Solutions Berhad has now broken into profitability. Since the stock has returned a staggering 620% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.