The Trends At Stella Holdings Berhad (KLSE:STELLA) That You Should Know About

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Stella Holdings Berhad (KLSE:STELLA) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Stella Holdings Berhad is:

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

0.091 = RM4.7m ÷ (RM66m - RM15m) (Based on the trailing twelve months to September 2020).

Therefore, Stella Holdings Berhad has an ROCE of 9.1%. In absolute terms, that's a low return, but it's much better than the Construction industry average of 5.0%.

View our latest analysis for Stella Holdings 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 Stella Holdings Berhad, check out these free graphs here.

How Are Returns Trending?

Over the past five years, Stella Holdings Berhad's ROCE has remained relatively flat while the business is using 20% 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. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.

On a side note, Stella Holdings Berhad has done well to reduce current liabilities to 23% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.

The Bottom Line On Stella Holdings Berhad's ROCE

It's a shame to see that Stella Holdings Berhad is effectively shrinking in terms of its capital base. Since the stock has gained an impressive 92% over the last five years, investors must think there's better things to come. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Stella Holdings Berhad does have some risks, we noticed 3 warning signs (and 1 which is concerning) we think you should know about.

While Stella Holdings Berhad isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.
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