Here's What To Make Of Hap Seng Consolidated Berhad's (KLSE:HAPSENG) Decelerating Rates Of Return

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Hap Seng Consolidated Berhad (KLSE:HAPSENG) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Hap Seng Consolidated Berhad:

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

0.093 = RM1.4b ÷ (RM19b - RM4.0b) (Based on the trailing twelve months to September 2022).

So, Hap Seng Consolidated Berhad has an ROCE of 9.3%. On its own, that's a low figure but it's around the 10% average generated by the Industrials industry.

View our latest analysis for Hap Seng Consolidated 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'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 The Trend Of ROCE Can Tell Us

In terms of Hap Seng Consolidated Berhad's historical ROCE trend, it doesn't exactly demand attention. The company has employed 77% more capital in the last five years, and the returns on that capital have remained stable at 9.3%. 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.

On a side note, Hap Seng Consolidated Berhad has done well to reduce current liabilities to 22% of total assets over the last five years. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Bottom Line On Hap Seng Consolidated Berhad's ROCE

In conclusion, Hap Seng Consolidated Berhad has been investing more capital into the business, but returns on that capital haven't increased. And in the last five years, the stock has given away 17% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Hap Seng Consolidated Berhad has the makings of a multi-bagger.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Hap Seng Consolidated Berhad (of which 2 are significant!) that you should know about.

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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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.