Stock Analysis

Muhibbah Engineering (M) Bhd (KLSE:MUHIBAH) May Have Issues Allocating Its Capital

KLSE:MUHIBAH
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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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. In light of that, when we looked at Muhibbah Engineering (M) Bhd (KLSE:MUHIBAH) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Muhibbah Engineering (M) Bhd:

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

0.015 = RM30m ÷ (RM3.2b - RM1.2b) (Based on the trailing twelve months to September 2022).

Thus, Muhibbah Engineering (M) Bhd has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Construction industry average of 5.3%.

View our latest analysis for Muhibbah Engineering (M) Bhd

roce
KLSE:MUHIBAH Return on Capital Employed January 10th 2023

Above you can see how the current ROCE for Muhibbah Engineering (M) Bhd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Muhibbah Engineering (M) Bhd here for free.

How Are Returns Trending?

On the surface, the trend of ROCE at Muhibbah Engineering (M) Bhd doesn't inspire confidence. To be more specific, ROCE has fallen from 7.2% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Muhibbah Engineering (M) Bhd has decreased its current liabilities to 38% of total assets. So we could link some of this to the decrease in ROCE. 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line On Muhibbah Engineering (M) Bhd's ROCE

In summary, we're somewhat concerned by Muhibbah Engineering (M) Bhd's diminishing returns on increasing amounts of capital. We expect this has contributed to the stock plummeting 81% during the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know about the risks facing Muhibbah Engineering (M) Bhd, we've discovered 2 warning signs that you should be aware of.

While Muhibbah Engineering (M) Bhd 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.