Hock Lian Seng Holdings (SGX:J2T) Is Doing The Right Things To Multiply Its Share Price

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Hock Lian Seng Holdings (SGX:J2T) so let's look a bit deeper.

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 Hock Lian Seng Holdings, this is the formula:

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

0.11 = S$30m ÷ (S$345m - S$72m) (Based on the trailing twelve months to June 2024).

So, Hock Lian Seng Holdings has an ROCE of 11%. That's a pretty standard return and it's in line with the industry average of 11%.

View our latest analysis for Hock Lian Seng Holdings

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hock Lian Seng Holdings' ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Hock Lian Seng Holdings.

What The Trend Of ROCE Can Tell Us

Investors would be pleased with what's happening at Hock Lian Seng Holdings. The data shows that returns on capital have increased substantially over the last five years to 11%. Basically the business is earning more per dollar of capital invested and in addition to that, 39% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a related note, the company's ratio of current liabilities to total assets has decreased to 21%, which basically reduces it's funding from the likes of short-term creditors or suppliers. This tells us that Hock Lian Seng Holdings has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

In Conclusion...

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Hock Lian Seng Holdings has. Since the stock has only returned 22% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

One more thing, we've spotted 1 warning sign facing Hock Lian Seng Holdings that you might find interesting.

While Hock Lian Seng Holdings isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.