Shareholders Would Enjoy A Repeat Of Hong Seng Consolidated Berhad's (KLSE:HONGSENG) Recent Growth In Returns

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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 when we looked at the ROCE trend of Hong Seng Consolidated Berhad (KLSE:HONGSENG) we really liked what we saw.

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. The formula for this calculation on Hong Seng Consolidated Berhad is:

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

0.26 = RM102m ÷ (RM442m - RM47m) (Based on the trailing twelve months to June 2022).

So, Hong Seng Consolidated Berhad has an ROCE of 26%. That's a fantastic return and not only that, it outpaces the average of 21% earned by companies in a similar industry.

View our latest analysis for Hong Seng Consolidated Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hong Seng Consolidated Berhad's ROCE against it's prior returns. If you'd like to look at how Hong Seng Consolidated Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Hong Seng Consolidated Berhad Tell Us?

We're delighted to see that Hong Seng Consolidated Berhad is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 26% on its capital. In addition to that, Hong Seng Consolidated Berhad is employing 590% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 11%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Hong Seng Consolidated Berhad has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From Hong Seng Consolidated Berhad's ROCE

In summary, it's great to see that Hong Seng Consolidated Berhad has managed to break into profitability and is continuing to reinvest in its business. And a remarkable 214% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

One final note, you should learn about the 2 warning signs we've spotted with Hong Seng Consolidated Berhad (including 1 which can't be ignored) .

Hong Seng Consolidated 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.