To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at the ROCE trend of Censof Holdings Berhad (KLSE:CENSOF) we really liked what we saw.
What Is 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. The formula for this calculation on Censof Holdings Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.22 = RM22m ÷ (RM124m - RM23m) (Based on the trailing twelve months to September 2022).
Thus, Censof Holdings Berhad has an ROCE of 22%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Censof Holdings Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Censof Holdings Berhad's ROCE Trending?
You'd find it hard not to be impressed with the ROCE trend at Censof Holdings Berhad. The figures show that over the last five years, returns on capital have grown by 113%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Interestingly, the business may be becoming more efficient because it's applying 47% less capital than it was five years ago. Censof Holdings Berhad may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.
What We Can Learn From Censof Holdings Berhad's ROCE
From what we've seen above, Censof Holdings Berhad has managed to increase it's returns on capital all the while reducing it's capital base. Since the stock has only returned 18% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.
Censof Holdings Berhad does have some risks though, and we've spotted 2 warning signs for Censof Holdings Berhad that you might be interested in.
High returns are a key ingredient to strong performance, so check out our free list ofstocks 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.
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