Should You Be Impressed By UMS-Neiken Group Berhad's (KLSE:UMSNGB) Returns on Capital?

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after investigating UMS-Neiken Group Berhad (KLSE:UMSNGB), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

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 UMS-Neiken Group Berhad:

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

0.052 = RM5.4m ÷ (RM113m - RM8.2m) (Based on the trailing twelve months to September 2020).

Therefore, UMS-Neiken Group Berhad has an ROCE of 5.2%. In absolute terms, that's a low return but it's around the Electrical industry average of 5.8%.

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'd like to look at how UMS-Neiken Group Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of UMS-Neiken Group Berhad's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 12%, but since then they've fallen to 5.2%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On UMS-Neiken Group Berhad's ROCE

To conclude, we've found that UMS-Neiken Group Berhad is reinvesting in the business, but returns have been falling. Unsurprisingly, the stock has only gained 4.2% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with UMS-Neiken Group Berhad (including 2 which is shouldn't be ignored) .

While UMS-Neiken Group Berhad isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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