Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Hai Leck Holdings (SGX:BLH) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Hai Leck Holdings, this is the formula:

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

0.12 = S$14m ÷ (S$140m - S$19m) (Based on the trailing twelve months to September 2022).

Thus, Hai Leck Holdings has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 3.4% generated by the Energy Services industry.

View our latest analysis for Hai Leck Holdings

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

What Can We Tell From Hai Leck Holdings' ROCE Trend?

There hasn't been much to report for Hai Leck Holdings' returns and its level of capital employed because both metrics have been steady for the past five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Hai Leck Holdings to be a multi-bagger going forward.

Our Take On Hai Leck Holdings' ROCE

In summary, Hai Leck Holdings isn't compounding its earnings but is generating stable returns on the same amount of capital employed. Unsurprisingly, the stock has only gained 18% over the last five years, which potentially indicates that investors are accounting for this going forward. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Hai Leck Holdings does have some risks, we noticed 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

While Hai Leck Holdings may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.

Join A Paid User Research Session
You’ll receive a US$30 Amazon Gift card for 1 hour of your time while helping us build better investing tools for the individual investors like yourself. Sign up here