Hap Seng Consolidated Berhad (KLSE:HAPSENG) Has Some Way To Go To Become A Multi-Bagger

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Having said that, from a first glance at Hap Seng Consolidated Berhad (KLSE:HAPSENG) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Hap Seng Consolidated Berhad:

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

0.097 = RM1.2b ÷ (RM17b - RM4.5b) (Based on the trailing twelve months to December 2020).

Therefore, Hap Seng Consolidated Berhad has an ROCE of 9.7%. On its own that's a low return on capital but it's in line with the industry's average returns of 9.7%.

View our latest analysis for Hap Seng Consolidated Berhad

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

What Does the ROCE Trend For Hap Seng Consolidated Berhad Tell Us?

In terms of Hap Seng Consolidated Berhad's historical ROCE trend, it doesn't exactly demand attention. Over the past five years, ROCE has remained relatively flat at around 9.7% and the business has deployed 84% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line On Hap Seng Consolidated Berhad's ROCE

Long story short, while Hap Seng Consolidated Berhad has been reinvesting its capital, the returns that it's generating haven't increased. Unsurprisingly, the stock has only gained 26% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One more thing: We've identified 3 warning signs with Hap Seng Consolidated Berhad (at least 1 which shouldn't be ignored) , and understanding these would certainly be useful.

While Hap 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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