We Think Hibiscus Petroleum Berhad (KLSE:HIBISCS) Might Have The DNA Of A Multi-Bagger

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. Speaking of which, we noticed some great changes in Hibiscus Petroleum Berhad's (KLSE:HIBISCS) returns on capital, so let's have a look.

What Is 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. The formula for this calculation on Hibiscus Petroleum Berhad is:

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

0.23 = RM931m ÷ (RM5.7b - RM1.6b) (Based on the trailing twelve months to September 2022).

Thus, Hibiscus Petroleum Berhad has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Oil and Gas industry average of 17%.

Our analysis indicates that HIBISCS is potentially undervalued!

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'd like to see what analysts are forecasting going forward, you should check out our free report for Hibiscus Petroleum Berhad.

What Can We Tell From Hibiscus Petroleum Berhad's ROCE Trend?

Hibiscus Petroleum Berhad is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 23%. 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 238%. So we're very much inspired by what we're seeing at Hibiscus Petroleum 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 28% 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...

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 only returned 24% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

If you want to know some of the risks facing Hibiscus Petroleum Berhad we've found 2 warning signs (1 is concerning!) that you should be aware of before investing here.

Hibiscus Petroleum Berhad is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.