There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we’d like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Homeritz Corporation Berhad (KLSE:HOMERIZ) 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)
For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Homeritz Corporation Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.14 = RM27m ÷ (RM222m – RM26m) (Based on the trailing twelve months to November 2020).
So, Homeritz Corporation Berhad has an ROCE of 14%. On its own, that’s a standard return, however it’s much better than the 11% generated by the Consumer Durables industry.
View our latest analysis for Homeritz Corporation Berhad
Above you can see how the current ROCE for Homeritz Corporation Berhad compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
The Trend Of ROCE
In terms of Homeritz Corporation Berhad’s historical ROCE movements, the trend isn’t fantastic. Over the last five years, returns on capital have decreased to 14% from 33% five years ago. Meanwhile, the business is utilizing more capital but this hasn’t moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It’s worth keeping an eye on the company’s earnings from here on to see if these investments do end up contributing to the bottom line.
What We Can Learn From Homeritz Corporation Berhad’s ROCE
Bringing it all together, while we’re somewhat encouraged by Homeritz Corporation Berhad’s reinvestment in its own business, we’re aware that returns are shrinking. Unsurprisingly, the stock has only gained 5.6% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you’re looking for a multi-bagger, we’d propose looking at other options.
On a final note, we found 4 warning signs for Homeritz Corporation Berhad (1 is concerning) you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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