MCE Holdings Berhad (KLSE:MCEHLDG) Shareholders Will Want The ROCE Trajectory To Continue

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in MCE Holdings Berhad's (KLSE:MCEHLDG) returns on capital, so let's have a look.

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. To calculate this metric for MCE Holdings Berhad, this is the formula:

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

0.0077 = RM739k ÷ (RM125m - RM29m) (Based on the trailing twelve months to January 2021).

So, MCE Holdings Berhad has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 3.7%.

Check out our latest analysis for MCE Holdings Berhad

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

What The Trend Of ROCE Can Tell Us

MCE Holdings Berhad has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 0.8%, which is always encouraging. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

The Bottom Line On MCE Holdings Berhad's ROCE

In summary, we're delighted to see that MCE Holdings Berhad has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has returned a solid 73% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you'd like to know more about MCE Holdings Berhad, we've spotted 3 warning signs, and 1 of them is a bit unpleasant.

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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