Capital Allocation Trends At My E.G. Services Berhad (KLSE:MYEG) Aren't Ideal

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think My E.G. Services Berhad (KLSE:MYEG) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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 My E.G. Services Berhad:

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

0.18 = RM650m ÷ (RM3.8b - RM178m) (Based on the trailing twelve months to June 2024).

Therefore, My E.G. Services Berhad has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Professional Services industry average of 13% it's much better.

See our latest analysis for My E.G. Services Berhad

In the above chart we have measured My E.G. Services Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for My E.G. Services Berhad .

The Trend Of ROCE

When we looked at the ROCE trend at My E.G. Services Berhad, we didn't gain much confidence. Around five years ago the returns on capital were 33%, but since then they've fallen to 18%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, My E.G. Services Berhad has decreased its current liabilities to 4.7% of total assets. That could partly explain why the ROCE has dropped. 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.

Our Take On My E.G. Services Berhad's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that My E.G. Services Berhad is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 39% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

One final note, you should learn about the 2 warning signs we've spotted with My E.G. Services Berhad (including 1 which is a bit concerning) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.