What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Speaking of which, we noticed some great changes in Hibiscus Petroleum Berhad's (KLSE:HIBISCS) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What is it?
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 Hibiscus Petroleum Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = RM315m ÷ (RM3.1b - RM673m) (Based on the trailing twelve months to December 2021).
Thus, Hibiscus Petroleum Berhad has an ROCE of 13%. By itself that's a normal return on capital and it's in line with the industry's average returns of 13%.
Above you can see how the current ROCE for Hibiscus Petroleum Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
We like the trends that we're seeing from Hibiscus Petroleum Berhad. Over the last five years, returns on capital employed have risen substantially to 13%. Basically the business is earning more per dollar of capital invested and in addition to that, 97% more capital is being employed now too. So we're very much inspired by what we're seeing at Hibiscus Petroleum Berhad thanks to its ability to profitably reinvest capital.
The Bottom Line
All in all, it's terrific to see that Hibiscus Petroleum Berhad is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 162% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
One more thing, we've spotted 2 warning signs facing Hibiscus Petroleum Berhad that you might find interesting.
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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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.