Returns On Capital At Hup Seng Industries Berhad (KLSE:HUPSENG) Have Stalled

By
Simply Wall St
Published
June 08, 2021
KLSE:HUPSENG
Source: Shutterstock

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So while Hup Seng Industries Berhad (KLSE:HUPSENG) has a high ROCE right now, lets see what we can decipher from how returns are changing.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Hup Seng Industries Berhad, this is the formula:

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

0.37 = RM52m ÷ (RM212m - RM70m) (Based on the trailing twelve months to March 2021).

Therefore, Hup Seng Industries Berhad has an ROCE of 37%. That's a fantastic return and not only that, it outpaces the average of 7.6% earned by companies in a similar industry.

Check out our latest analysis for Hup Seng Industries Berhad

roce
KLSE:HUPSENG Return on Capital Employed June 8th 2021

Above you can see how the current ROCE for Hup Seng Industries 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.

The Trend Of ROCE

There hasn't been much to report for Hup Seng Industries Berhad's returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. So it may not be a multi-bagger in the making, but given the decent 37% return on capital, it'd be difficult to find fault with the business's current operations. That probably explains why Hup Seng Industries Berhad has been paying out 108% of its earnings as dividends to shareholders. These mature businesses typically have reliable earnings and not many places to reinvest them, so the next best option is to put the earnings into shareholders pockets.

The Key Takeaway

Although is allocating it's capital efficiently to generate impressive returns, it isn't compounding its base of capital, which is what we'd see from a multi-bagger. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

One more thing to note, we've identified 1 warning sign with Hup Seng Industries Berhad and understanding it should be part of your investment process.

Hup Seng Industries 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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