Returns On Capital Are Showing Encouraging Signs At Hextar Industries Berhad (KLSE:HEXIND)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at Hextar Industries Berhad (KLSE:HEXIND) so let's look a bit deeper.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Hextar Industries Berhad, this is the formula:

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

0.08 = RM11m ÷ (RM176m - RM43m) (Based on the trailing twelve months to May 2021).

Thus, Hextar Industries Berhad has an ROCE of 8.0%. On its own that's a low return, but compared to the average of 6.1% generated by the Trade Distributors industry, it's much better.

Check out our latest analysis for Hextar Industries Berhad

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

What Can We Tell From Hextar Industries Berhad's ROCE Trend?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The data shows that returns on capital have increased substantially over the last five years to 8.0%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 105%. So we're very much inspired by what we're seeing at Hextar Industries Berhad thanks to its ability to profitably reinvest capital.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 25% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

In Conclusion...

In summary, it's great to see that Hextar Industries Berhad can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And since the stock has fallen 49% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

One final note, you should learn about the 4 warning signs we've spotted with Hextar Industries Berhad (including 2 which can't be ignored) .

While Hextar Industries 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.

If you’re looking to trade a wide range of investments, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.