My E.G. Services Berhad's (KLSE:MYEG) Returns On Capital Not Reflecting Well On The Business

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 My E.G. Services Berhad (KLSE:MYEG) 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)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for My E.G. Services Berhad, this is the formula:

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

0.16 = RM384m ÷ (RM2.7b - RM356m) (Based on the trailing twelve months to March 2023).

Therefore, My E.G. Services Berhad has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Professional Services industry average of 10% it's much better.

Check out 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'd like to see what analysts are forecasting going forward, you should check out our free report for My E.G. Services Berhad.

SWOT Analysis for My E.G. Services Berhad

How Are Returns Trending?

When we looked at the ROCE trend at My E.G. Services Berhad, we didn't gain much confidence. To be more specific, ROCE has fallen from 32% over the last five years. However it looks like My E.G. Services 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.

The Bottom Line On My E.G. Services Berhad's ROCE

Bringing it all together, while we're somewhat encouraged by My E.G. Services Berhad's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 84% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

If you'd like to know about the risks facing My E.G. Services Berhad, we've discovered 1 warning sign that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.