If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at the ROCE trend of CRG Berhad (KLSE:CRG) we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for CRG Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.24 = RM28m ÷ (RM136m - RM20m) (Based on the trailing twelve months to June 2022).
So, CRG Berhad has an ROCE of 24%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 18%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for CRG Berhad's ROCE against it's prior returns. If you'd like to look at how CRG 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 CRG Berhad's ROCE Trending?
We like the trends that we're seeing from CRG Berhad. The data shows that returns on capital have increased substantially over the last five years to 24%. Basically the business is earning more per dollar of capital invested and in addition to that, 37% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
The Bottom Line
All in all, it's terrific to see that CRG Berhad is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 322% to shareholders over the last three years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
CRG Berhad does have some risks though, and we've spotted 2 warning signs for CRG 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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