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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Hil Industries Berhad (KLSE:HIL) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What Is It?
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 Hil Industries Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.081 = RM36m ÷ (RM490m - RM42m) (Based on the trailing twelve months to June 2023).
Thus, Hil Industries Berhad has an ROCE of 8.1%. In absolute terms, that's a low return but it's around the Chemicals industry average of 6.9%.
See our latest analysis for Hil Industries Berhad
Above you can see how the current ROCE for Hil Industries Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Hil Industries Berhad here for free.
How Are Returns Trending?
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 8.1%. Basically the business is earning more per dollar of capital invested and in addition to that, 21% more capital is being employed now too. So we're very much inspired by what we're seeing at Hil Industries Berhad thanks to its ability to profitably reinvest capital.
On a related note, the company's ratio of current liabilities to total assets has decreased to 8.6%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
The Bottom Line
In summary, it's great to see that Hil Industries 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. Since the stock has returned a solid 73% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.