Hiap Teck Venture Berhad (KLSE:HIAPTEK) May Have Issues Allocating Its Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Having said that, from a first glance at Hiap Teck Venture Berhad (KLSE:HIAPTEK) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding 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. To calculate this metric for Hiap Teck Venture Berhad, this is the formula:

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

0.12 = RM151m ÷ (RM2.0b - RM740m) (Based on the trailing twelve months to July 2022).

Therefore, Hiap Teck Venture Berhad has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 13% generated by the Metals and Mining industry.

Check out the opportunities and risks within the MY Metals and Mining industry.

Above you can see how the current ROCE for Hiap Teck Venture 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 Hiap Teck Venture Berhad.

The Trend Of ROCE

On the surface, the trend of ROCE at Hiap Teck Venture Berhad doesn't inspire confidence. Over the last five years, returns on capital have decreased to 12% from 19% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line On Hiap Teck Venture Berhad's ROCE

While returns have fallen for Hiap Teck Venture Berhad in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 43% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you'd like to know more about Hiap Teck Venture Berhad, we've spotted 5 warning signs, and 2 of them can't be ignored.

While Hiap Teck Venture Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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.