To find a multi-bagger stock, what underlying trends should we look for in a company? First, we would like to identify a growth to return to on capital employed (ROCE) and at the same time, a based capital employed. Simply put, these types of businesses are slot machines, meaning they continually reinvest their profits at ever-higher rates of return. That said, at a first glance at JHM Consolidation Berhad (KLSE:JHM) we’re not jumping off our chairs on the yield trend, but taking a closer look.
Return on capital employed (ROCE): what is it?
For those who don’t know what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital used in its business. Analysts use this formula to calculate it for JHM Consolidation Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.14 = RM39m ÷ (RM353m – RM77m) (Based on the last twelve months to September 2021).
So, JHM Consolidation Berhad posted a ROCE of 14%. This in itself is a normal return on capital and is in line with industry average returns of 14%.
Check out our latest analysis for JHM Consolidation Berhad
In the chart above, we have measured JHM Consolidation Berhad’s past ROCE against its past performance, but the future is arguably more important. If you wish, you can view analyst forecasts covering JHM Consolidation Berhad here for free.
The ROCE trend
In terms of historical movements of JHM Consolidation Berhad’s ROCE, the trend is not fantastic. Over the past five years, capital returns have declined to 14% from 37% five years ago. Although, given that revenue and the amount of assets used in the business have increased, it could suggest that the business is investing in growth and that the additional capital has resulted in a short-term reduction in ROCE. And if the capital increase generates additional returns, the company, and therefore the shareholders, will benefit in the long term.
Furthermore, JHM Consolidation Berhad did well to repay its current liabilities at 22% of total assets. So we could tie some of that to the decline in ROCE. Additionally, it may reduce some aspects of risk to the business, as the business’s suppliers or short-term creditors now fund less of its operations. Some would argue that this reduces the company’s effectiveness in generating a return on investment, as it now funds more of the operations with its own money.
Even though capital returns have fallen in the short term, we think it is promising that both revenue and capital employed have increased for JHM Consolidation Berhad. And long-term investors should be optimistic going forward as the stock has returned a whopping 283% to shareholders over the past five years. So if these growth trends continue, we would be optimistic about the stock going forward.
Finally we found 2 warning signs for JHM Consolidation Berhad (1 is concerning) that you should be aware of.
For those who like to invest in solid companies, look at this free list of companies with strong balance sheets and high returns on equity.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.