MTAG Group Berhad (KLSE:MTAG) Might Be Having Difficulty Using Its Capital Effectively

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at MTAG Group Berhad (KLSE:MTAG) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. To calculate this metric for MTAG Group Berhad, this is the formula:

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

0.18 = RM39m ÷ (RM233m - RM11m) (Based on the trailing twelve months to March 2023).

So, MTAG Group Berhad has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 7.7% generated by the Commercial Services industry.

Check out our latest analysis for MTAG Group Berhad

Above you can see how the current ROCE for MTAG Group Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is MTAG Group Berhad's ROCE Trending?

On the surface, the trend of ROCE at MTAG Group Berhad doesn't inspire confidence. Over the last five years, returns on capital have decreased to 18% from 46% five years ago. However it looks like MTAG Group Berhad might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, MTAG Group Berhad has decreased its current liabilities to 4.6% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On MTAG Group Berhad's ROCE

Bringing it all together, while we're somewhat encouraged by MTAG Group Berhad's reinvestment in its own business, we're aware that returns are shrinking. Additionally, the stock's total return to shareholders over the last three years has been flat, which isn't too surprising. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

If you'd like to know about the risks facing MTAG Group Berhad, we've discovered 2 warning signs that you should be aware of.

While MTAG 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. 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.