There's Been No Shortage Of Growth Recently For Hong Seng Consolidated Berhad's (KLSE:HONGSENG) Returns On Capital
If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So when we looked at Hong Seng Consolidated Berhad (KLSE:HONGSENG) and its trend of ROCE, we really liked what we saw.
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. Analysts use this formula to calculate it for Hong Seng Consolidated Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = RM52m ÷ (RM432m - RM27m) (Based on the trailing twelve months to September 2022).
Thus, Hong Seng Consolidated Berhad has an ROCE of 13%. By itself that's a normal return on capital and it's in line with the industry's average returns of 13%.
View our latest analysis for Hong Seng Consolidated 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 Hong Seng Consolidated Berhad's past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
The fact that Hong Seng Consolidated Berhad is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 13% on its capital. In addition to that, Hong Seng Consolidated Berhad is employing 650% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 6.3%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
What We Can Learn From Hong Seng Consolidated Berhad's ROCE
To the delight of most shareholders, Hong Seng Consolidated Berhad has now broken into profitability. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
If you want to continue researching Hong Seng Consolidated Berhad, you might be interested to know about the 2 warning signs that our analysis has discovered.
While Hong Seng Consolidated Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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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.
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