There's Been No Shortage Of Growth Recently For Melati Ehsan Holdings Berhad's (KLSE:MELATI) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Melati Ehsan Holdings Berhad's (KLSE:MELATI) 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 Melati Ehsan Holdings Berhad, this is the formula:

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

0.042 = RM13m ÷ (RM405m - RM87m) (Based on the trailing twelve months to May 2023).

Thus, Melati Ehsan Holdings Berhad has an ROCE of 4.2%. In absolute terms, that's a low return but it's around the Construction industry average of 5.1%.

View our latest analysis for Melati Ehsan Holdings Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Melati Ehsan Holdings Berhad's ROCE against it's prior returns. If you'd like to look at how Melati Ehsan Holdings 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 Melati Ehsan Holdings Berhad's ROCE Trending?

While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 4.2%. The amount of capital employed has increased too, by 49%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 22%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Melati Ehsan Holdings Berhad has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line On Melati Ehsan Holdings Berhad's ROCE

To sum it up, Melati Ehsan Holdings Berhad has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

On a final note, we found 2 warning signs for Melati Ehsan Holdings Berhad (1 is concerning) you should be aware of.

While Melati Ehsan Holdings Berhad isn't earning the highest return, check out this free list of companies that are 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.