Hiap Huat Holdings Berhad (KLSE:HHHCORP) Shareholders Will Want The ROCE Trajectory To Continue

By
Simply Wall St
Published
May 25, 2021
KLSE:HHHCORP
Source: Shutterstock

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Hiap Huat Holdings Berhad (KLSE:HHHCORP) and its trend of ROCE, we really liked what we saw.

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 Hiap Huat Holdings Berhad:

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

0.0021 = RM173k ÷ (RM91m - RM8.0m) (Based on the trailing twelve months to March 2021).

Thus, Hiap Huat Holdings Berhad has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 5.1%.

Check out our latest analysis for Hiap Huat Holdings Berhad

roce
KLSE:HHHCORP Return on Capital Employed May 26th 2021

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 Hiap Huat Holdings Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

Shareholders will be relieved that Hiap Huat Holdings Berhad has broken into profitability. The company now earns 0.2% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Hiap Huat Holdings Berhad has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

The Bottom Line On Hiap Huat Holdings Berhad's ROCE

As discussed above, Hiap Huat Holdings Berhad appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Considering the stock has delivered 24% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

Like most companies, Hiap Huat Holdings Berhad does come with some risks, and we've found 1 warning sign that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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