Will Matang Berhad (KLSE:MATANG) Multiply In Value Going Forward?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Matang Berhad (KLSE:MATANG) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on Matang Berhad is:

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

0.011 = RM2.1m ÷ (RM190m - RM1.7m) (Based on the trailing twelve months to September 2020).

Thus, Matang Berhad has an ROCE of 1.1%. Ultimately, that's a low return and it under-performs the Food industry average of 6.8%.

Check out our latest analysis for Matang Berhad

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

What The Trend Of ROCE Can Tell Us

Over the past five years, Matang Berhad's ROCE and capital employed have both remained mostly flat. This tells us the company isn't reinvesting in itself, so it's plausible that it's past the growth phase. With that in mind, unless investment picks up again in the future, we wouldn't expect Matang Berhad to be a multi-bagger going forward.

What We Can Learn From Matang Berhad's ROCE

In summary, Matang Berhad isn't compounding its earnings but is generating stable returns on the same amount of capital employed. And in the last three years, the stock has given away 23% so the market doesn't look too hopeful on these trends strengthening any time soon. 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.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Matang Berhad (of which 1 is a bit unpleasant!) that you should know about.

While Matang Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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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