Shareholders Are Optimistic That Guan Chong Berhad (KLSE:GCB) Will Multiply In Value

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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 ran our eye over Guan Chong Berhad's (KLSE:GCB) trend of ROCE, we really liked what we saw.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

What Is 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. The formula for this calculation on Guan Chong Berhad is:

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

0.26 = RM795m ÷ (RM9.4b - RM6.4b) (Based on the trailing twelve months to December 2024).

So, Guan Chong Berhad has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Food industry average of 9.7%.

Check out our latest analysis for Guan Chong Berhad

In the above chart we have measured Guan Chong Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Guan Chong Berhad for free.

The Trend Of ROCE

In terms of Guan Chong Berhad's history of ROCE, it's quite impressive. Over the past five years, ROCE has remained relatively flat at around 26% and the business has deployed 192% more capital into its operations. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. You'll see this when looking at well operated businesses or favorable business models.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 68% of total assets, this reported ROCE would probably be less than26% because total capital employed would be higher.The 26% ROCE could be even lower if current liabilities weren't 68% of total assets, because the the formula would show a larger base of total capital employed. So with current liabilities at such high levels, this effectively means the likes of suppliers or short-term creditors are funding a meaningful part of the business, which in some instances can bring some risks.

What We Can Learn From Guan Chong Berhad's ROCE

In summary, we're delighted to see that Guan Chong Berhad has been compounding returns by reinvesting at consistently high rates of return, as these are common traits of a multi-bagger. Therefore it's no surprise that shareholders have earned a respectable 45% return if they held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

One final note, you should learn about the 3 warning signs we've spotted with Guan Chong Berhad (including 2 which are significant) .

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.