MHC Plantations Bhd (KLSE:MHC) Is Looking To Continue Growing Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in MHC Plantations Bhd's (KLSE:MHC) returns on capital, so let's have a 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. Analysts use this formula to calculate it for MHC Plantations Bhd:

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

0.06 = RM36m ÷ (RM699m - RM95m) (Based on the trailing twelve months to December 2020).

Therefore, MHC Plantations Bhd has an ROCE of 6.0%. In absolute terms, that's a low return but it's around the Food industry average of 7.0%.

Check out our latest analysis for MHC Plantations Bhd

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of MHC Plantations Bhd, check out these free graphs here.

What Can We Tell From MHC Plantations Bhd's ROCE Trend?

We're pretty happy with how the ROCE has been trending at MHC Plantations Bhd. We found that the returns on capital employed over the last five years have risen by 390%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Interestingly, the business may be becoming more efficient because it's applying 49% less capital than it was five years ago. MHC Plantations Bhd may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

Our Take On MHC Plantations Bhd's ROCE

In summary, it's great to see that MHC Plantations Bhd has been able to turn things around and earn higher returns on lower amounts of capital. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 6.0% to shareholders. So with that in mind, we think the stock deserves further research.

One final note, you should learn about the 3 warning signs we've spotted with MHC Plantations Bhd (including 1 which is concerning) .

While MHC Plantations Bhd 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. 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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