Investors Could Be Concerned With Mitrajaya Holdings Berhad's (KLSE:MITRA) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. In light of that, when we looked at Mitrajaya Holdings Berhad (KLSE:MITRA) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Mitrajaya Holdings Berhad:

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

0.028 = RM23m ÷ (RM1.1b - RM336m) (Based on the trailing twelve months to March 2021).

Thus, Mitrajaya Holdings Berhad has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Construction industry average of 6.5%.

View our latest analysis for Mitrajaya Holdings Berhad

Above you can see how the current ROCE for Mitrajaya Holdings Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Mitrajaya Holdings Berhad's ROCE Trending?

When we looked at the ROCE trend at Mitrajaya Holdings Berhad, we didn't gain much confidence. To be more specific, ROCE has fallen from 24% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, Mitrajaya Holdings Berhad has done well to pay down its current liabilities to 29% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Mitrajaya Holdings Berhad's ROCE

In summary, we're somewhat concerned by Mitrajaya Holdings Berhad's diminishing returns on increasing amounts of capital. We expect this has contributed to the stock plummeting 74% during the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we found 4 warning signs for Mitrajaya Holdings Berhad (1 is significant) you should be aware of.

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This article by Simply Wall St is general in nature. 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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