Some Investors May Be Worried About My E.G. Services Berhad's (KLSE:MYEG) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. 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.

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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. 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)

0.18 = RM790m ÷ (RM4.5b - RM190m) (Based on the trailing twelve months to March 2025).

Therefore, My E.G. Services Berhad has an ROCE of 18%. That's a relatively normal return on capital, and it's around the 16% generated by the Professional Services industry.

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 .

How Are Returns Trending?

We weren't thrilled with the trend because My E.G. Services Berhad's ROCE has reduced by 31% over the last five years, while the business employed 357% more capital. That being said, My E.G. Services Berhad raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with My E.G. Services Berhad's earnings and if they change as a result from the capital raise.

On a related note, My E.G. Services Berhad has decreased its current liabilities to 4.2% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

While returns have fallen for My E.G. Services Berhad in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 41% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

One more thing: We've identified 2 warning signs with My E.G. Services Berhad (at least 1 which is concerning) , and understanding them would certainly be useful.

While My E.G. Services 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.