If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Engtex Group Berhad (KLSE:ENGTEX), we don't think it's current trends fit the mold of a multi-bagger.
Understanding Return On Capital Employed (ROCE)
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 Engtex Group Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = RM117m ÷ (RM1.4b - RM586m) (Based on the trailing twelve months to December 2021).
So, Engtex Group Berhad has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Trade Distributors industry average of 5.6% it's much better.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Engtex Group Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Engtex Group Berhad, check out these free graphs here.
How Are Returns Trending?
Over the past five years, Engtex Group Berhad's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Engtex Group Berhad to be a multi-bagger going forward.
On a side note, Engtex Group Berhad's current liabilities are still rather high at 41% of total assets. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line On Engtex Group Berhad's ROCE
In summary, Engtex Group Berhad isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And in the last five years, the stock has given away 43% so the market doesn't look too hopeful on these trends strengthening any time soon. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Engtex Group Berhad (of which 2 are significant!) that you should know about.
While Engtex Group 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.
Valuation is complex, but we're helping make it simple.
Find out whether Engtex Group Berhad is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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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.
Engtex Group Berhad
Engtex Group Berhad, together with its subsidiaries, engages in the wholesale and distribution of pipes, valves, fittings, plumbing materials, steel related products, general hardware products, and construction materials in Malaysia.
Fair value with moderate growth potential.