Boustead Heavy Industries Corporation Berhad (KLSE:BHIC) Has Some Way To Go To Become A Multi-Bagger

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Looking at Boustead Heavy Industries Corporation Berhad (KLSE:BHIC), it does have a high ROCE right now, but lets see how returns are trending.

Return On Capital Employed (ROCE): What Is It?

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 Boustead Heavy Industries Corporation Berhad:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.27 = RM46m ÷ (RM485m - RM312m) (Based on the trailing twelve months to March 2022).

Thus, Boustead Heavy Industries Corporation Berhad has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Machinery industry average of 12%.

Check out our latest analysis for Boustead Heavy Industries Corporation Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Boustead Heavy Industries Corporation Berhad's ROCE against it's prior returns. If you'd like to look at how Boustead Heavy Industries Corporation Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Boustead Heavy Industries Corporation Berhad's ROCE Trending?

Over the past five years, Boustead Heavy Industries Corporation Berhad's ROCE has remained relatively flat while the business is using 51% less capital than before. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. But we have to give it to Boustead Heavy Industries Corporation Berhad because the returns on the capital it is employing are still high in relative terms.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 64% of total assets, this reported ROCE would probably be less than27% because total capital employed would be higher.The 27% ROCE could be even lower if current liabilities weren't 64% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.

The Bottom Line

It's a shame to see that Boustead Heavy Industries Corporation Berhad is effectively shrinking in terms of its capital base. And investors may be expecting the fundamentals to get a lot worse because the stock has crashed 82% over the last five years. Therefore based on the analysis done in this article, we don't think Boustead Heavy Industries Corporation Berhad has the makings of a multi-bagger.

Boustead Heavy Industries Corporation Berhad does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit concerning...

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.