Harbour-Link Group Berhad (KLSE:HARBOUR) Will Want To Turn Around Its Return Trends

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Although, when we looked at Harbour-Link Group Berhad (KLSE:HARBOUR), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Harbour-Link Group Berhad is:

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

0.095 = RM54m ÷ (RM700m - RM129m) (Based on the trailing twelve months to March 2021).

Thus, Harbour-Link Group Berhad has an ROCE of 9.5%. On its own that's a low return, but compared to the average of 5.1% generated by the Shipping industry, it's much better.

View our latest analysis for Harbour-Link Group Berhad

In the above chart we have measured Harbour-Link Group Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Harbour-Link Group Berhad.

What Does the ROCE Trend For Harbour-Link Group Berhad Tell Us?

When we looked at the ROCE trend at Harbour-Link Group Berhad, we didn't gain much confidence. To be more specific, ROCE has fallen from 22% over the last five years. However it looks like Harbour-Link Group Berhad might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Harbour-Link Group Berhad has done well to pay down its current liabilities to 18% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Harbour-Link Group Berhad's ROCE

In summary, Harbour-Link Group Berhad is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And with the stock having returned a mere 15% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

On a final note, we've found 1 warning sign for Harbour-Link Group Berhad that we think you should be aware of.

While Harbour-Link Group 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.

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