What We Make Of Muar Ban Lee Group Berhad's (KLSE:MBL) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Muar Ban Lee Group Berhad's (KLSE:MBL) returns on capital, so let's have a look.

Understanding 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. Analysts use this formula to calculate it for Muar Ban Lee Group Berhad:

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

0.13 = RM24m ÷ (RM247m - RM70m) (Based on the trailing twelve months to September 2020).

Thus, Muar Ban Lee Group Berhad has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 10% generated by the Machinery industry.

See our latest analysis for Muar Ban Lee Group Berhad

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're interested in investigating Muar Ban Lee Group Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Muar Ban Lee Group Berhad Tell Us?

We like the trends that we're seeing from Muar Ban Lee Group Berhad. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 13%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 80%. 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.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 28% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

What We Can Learn From Muar Ban Lee Group Berhad's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Muar Ban Lee Group Berhad has. And with a respectable 78% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you'd like to know about the risks facing Muar Ban Lee Group Berhad, we've discovered 2 warning signs that you should be aware of.

While Muar Ban Lee Group Berhad 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.

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