Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Hiap Teck Venture Berhad (KLSE:HIAPTEK), we don't think it's current trends fit the mold of a multi-bagger.
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. To calculate this metric for Hiap Teck Venture Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0033 = RM4.2m ÷ (RM1.9b - RM593m) (Based on the trailing twelve months to July 2023).
So, Hiap Teck Venture Berhad has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 8.1%.
Above you can see how the current ROCE for Hiap Teck Venture Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Hiap Teck Venture Berhad.
What Can We Tell From Hiap Teck Venture Berhad's ROCE Trend?
In terms of Hiap Teck Venture Berhad's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 0.3% from 13% five years ago. However it looks like Hiap Teck Venture Berhad might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
On a side note, Hiap Teck Venture Berhad has done well to pay down its current liabilities to 31% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
Our Take On Hiap Teck Venture Berhad's ROCE
In summary, Hiap Teck Venture Berhad is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And with the stock having returned a mere 18% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
Hiap Teck Venture Berhad does have some risks though, and we've spotted 1 warning sign for Hiap Teck Venture Berhad that you might be interested in.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.