What We Make Of Malpac Holdings Berhad's (KLSE:MALPAC) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Malpac Holdings Berhad (KLSE:MALPAC) and its trend of ROCE, we really liked what we saw.

Understanding 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. The formula for this calculation on Malpac Holdings Berhad is:

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

0.0085 = RM1.5m ÷ (RM216m - RM44m) (Based on the trailing twelve months to December 2020).

Therefore, Malpac Holdings Berhad has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the Food industry average of 7.7%.

See our latest analysis for Malpac Holdings Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Malpac Holdings Berhad's ROCE against it's prior returns. If you're interested in investigating Malpac Holdings Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Malpac Holdings Berhad Tell Us?

Shareholders will be relieved that Malpac Holdings Berhad has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 0.8%, which is always encouraging. While returns have increased, the amount of capital employed by Malpac Holdings Berhad has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 20% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Key Takeaway

In summary, we're delighted to see that Malpac Holdings Berhad has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has fallen 38% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

Malpac Holdings Berhad does have some risks though, and we've spotted 3 warning signs for Malpac Holdings Berhad that you might be interested in.

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. 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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