If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Having said that, from a first glance at Freight Management Holdings Bhd (KLSE:FREIGHT) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What is 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. The formula for this calculation on Freight Management Holdings Bhd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.055 = RM21m ÷ (RM485m - RM95m) (Based on the trailing twelve months to September 2020).
Thus, Freight Management Holdings Bhd has an ROCE of 5.5%. On its own that's a low return, but compared to the average of 4.3% generated by the Shipping industry, it's much better.
In the above chart we have measured Freight Management Holdings Bhd'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 Freight Management Holdings Bhd here for free.
What Can We Tell From Freight Management Holdings Bhd's ROCE Trend?
Things have been pretty stable at Freight Management Holdings Bhd, with its capital employed and returns on that capital staying somewhat the same for the last 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. With that in mind, unless investment picks up again in the future, we wouldn't expect Freight Management Holdings Bhd to be a multi-bagger going forward. This probably explains why Freight Management Holdings Bhd is paying out 53% of its income to shareholders in the form of dividends. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.
Our Take On Freight Management Holdings Bhd's ROCE
In a nutshell, Freight Management Holdings Bhd has been trudging along with the same returns from the same amount of capital over the last five years. Although the market must be expecting these trends to improve because the stock has gained 69% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
On a separate note, we've found 3 warning signs for Freight Management Holdings Bhd you'll probably want to know about.
While Freight Management Holdings Bhd 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.
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