There are a few key trends to look for if we want to identify the next multi-bagger. 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. 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 SHH Resources Holdings Berhad (KLSE:SHH) so let’s look a bit deeper.
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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 SHH Resources Holdings Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.04 = RM3.5m ÷ (RM103m – RM16m) (Based on the trailing twelve months to December 2024).
Therefore, SHH Resources Holdings Berhad has an ROCE of 4.0%. On its own, that’s a low figure but it’s around the 4.8% average generated by the Consumer Durables industry.
Check out our latest analysis for SHH Resources Holdings Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for SHH Resources Holdings Berhad’s ROCE against it’s prior returns. If you’re interested in investigating SHH Resources Holdings Berhad’s past further, check out this free graph covering SHH Resources Holdings Berhad’s past earnings, revenue and cash flow.
The fact that SHH Resources Holdings Berhad is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making five years ago but is is now generating 4.0% on its capital. In addition to that, SHH Resources Holdings Berhad is employing 27% more capital than previously which is expected of a company that’s trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.
On a related note, the company’s ratio of current liabilities to total assets has decreased to 16%, which basically reduces it’s funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business’ underlying economics, which is great to see.