Has Superlon Holdings Berhad (KLSE:SUPERLN) Got What It Takes To Become A Multi-Bagger?

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Although, when we looked at Superlon Holdings Berhad (KLSE:SUPERLN), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Superlon Holdings Berhad, this is the formula:

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

0.088 = RM13m ÷ (RM159m - RM13m) (Based on the trailing twelve months to July 2020).

Thus, Superlon Holdings Berhad has an ROCE of 8.8%. On its own that's a low return, but compared to the average of 7.0% generated by the Building industry, it's much better.

View our latest analysis for Superlon Holdings Berhad

Above you can see how the current ROCE for Superlon Holdings Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Superlon Holdings Berhad.

How Are Returns Trending?

When we looked at the ROCE trend at Superlon Holdings Berhad, we didn't gain much confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 8.8%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On Superlon Holdings Berhad's ROCE

Bringing it all together, while we're somewhat encouraged by Superlon Holdings Berhad's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly then, the total return to shareholders over the last five years has been flat. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

On a separate note, we've found 2 warning signs for Superlon Holdings Berhad you'll probably want to know about.

While Superlon 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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