Should You Be Impressed By Boustead Heavy Industries Corporation Berhad's (KLSE:BHIC) Returns on Capital?

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Boustead Heavy Industries Corporation Berhad (KLSE:BHIC), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.13 = RM28m ÷ (RM483m - RM264m) (Based on the trailing twelve months to September 2020).

Thus, Boustead Heavy Industries Corporation Berhad has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 9.6% it's much better.

Check out our latest analysis for Boustead Heavy Industries Corporation 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 want to delve into the historical earnings, revenue and cash flow of Boustead Heavy Industries Corporation Berhad, check out these free graphs here.

What Can We Tell From Boustead Heavy Industries Corporation Berhad's ROCE Trend?

Over the past five years, Boustead Heavy Industries Corporation Berhad's ROCE has remained relatively flat while the business is using 34% less capital than before. This indicates to us that assets are being sold and thus the business is likely shrinking, which you'll remember isn't the typical ingredients for an up-and-coming multi-bagger. So if this trend continues, don't be surprised if the business is smaller in a few years time.

On a separate but related note, it's important to know that Boustead Heavy Industries Corporation Berhad has a current liabilities to total assets ratio of 55%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Boustead Heavy Industries Corporation Berhad's ROCE

It's a shame to see that Boustead Heavy Industries Corporation Berhad is effectively shrinking in terms of its capital base. Since the stock has declined 67% over the last five years, investors may not be too optimistic on this trend improving either. 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.

If you want to know some of the risks facing Boustead Heavy Industries Corporation Berhad we've found 2 warning signs (1 can't be ignored!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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