Investors Will Want Mudajaya Group Berhad's (KLSE:MUDAJYA) Growth In ROCE To Persist

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Mudajaya Group Berhad (KLSE:MUDAJYA) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Mudajaya Group Berhad:

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

0.031 = RM20m ÷ (RM965m - RM322m) (Based on the trailing twelve months to June 2022).

Thus, Mudajaya Group Berhad has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 5.1%.

Check out the opportunities and risks within the MY Construction industry.

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 Mudajaya Group Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Mudajaya Group Berhad's ROCE Trending?

It's great to see that Mudajaya Group Berhad has started to generate some pre-tax earnings from prior investments. While the business is profitable now, it used to be incurring losses on invested capital five years ago. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 40%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.

One more thing to note, Mudajaya Group Berhad has decreased current liabilities to 33% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Key Takeaway

In summary, it's great to see that Mudajaya Group Berhad has been able to turn things around and earn higher returns on lower amounts of capital. However the stock is down a substantial 84% in the last five years so there could be other areas of the business hurting its prospects. In any case, we believe the economic trends of this company are positive and looking into the stock further could prove rewarding.

Mudajaya Group Berhad does have some risks, we noticed 4 warning signs (and 1 which is significant) we think you should know about.

While Mudajaya 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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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.