What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at MMS Ventures Berhad (KLSE:MMSV), it didn't seem to tick all of these boxes.
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. To calculate this metric for MMS Ventures Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = RM8.2m ÷ (RM75m - RM9.5m) (Based on the trailing twelve months to September 2021).
Therefore, MMS Ventures Berhad has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Machinery industry average of 11%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for MMS Ventures Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of MMS Ventures Berhad, check out these free graphs here.
What Does the ROCE Trend For MMS Ventures Berhad Tell Us?
On the surface, the trend of ROCE at MMS Ventures Berhad doesn't inspire confidence. Around five years ago the returns on capital were 22%, but since then they've fallen to 12%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
What We Can Learn From MMS Ventures Berhad's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that MMS Ventures Berhad is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 112% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.
If you want to know some of the risks facing MMS Ventures Berhad we've found 4 warning signs (1 is concerning!) that you should be aware of before investing here.
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.
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.