Returns On Capital At UMS-Neiken Group Berhad (KLSE:UMSNGB) Paint A Concerning Picture

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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Having said that, from a first glance at UMS-Neiken Group Berhad (KLSE:UMSNGB) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper 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. The formula for this calculation on UMS-Neiken Group Berhad is:

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

0.052 = RM5.5m ÷ (RM114m - RM8.2m) (Based on the trailing twelve months to December 2020).

Therefore, UMS-Neiken Group Berhad has an ROCE of 5.2%. Ultimately, that's a low return and it under-performs the Electrical industry average of 10%.

See our latest analysis for UMS-Neiken Group Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for UMS-Neiken Group Berhad's ROCE against it's prior returns. If you're interested in investigating UMS-Neiken Group Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at UMS-Neiken Group Berhad doesn't inspire confidence. Around five years ago the returns on capital were 9.6%, but since then they've fallen to 5.2%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by UMS-Neiken Group Berhad's reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 4.9% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

UMS-Neiken Group Berhad does have some risks, we noticed 2 warning signs (and 1 which is potentially serious) we think you should know about.

While UMS-Neiken 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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