Returns Are Gaining Momentum At MSM Malaysia Holdings Berhad (KLSE:MSM)

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. So on that note, MSM Malaysia Holdings Berhad (KLSE:MSM) looks quite promising in regards to its trends of return on capital.

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What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on MSM Malaysia Holdings Berhad is:

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

0.065 = RM112m ÷ (RM3.2b - RM1.4b) (Based on the trailing twelve months to December 2024).

Therefore, MSM Malaysia Holdings Berhad has an ROCE of 6.5%. In absolute terms, that's a low return and it also under-performs the Food industry average of 9.4%.

View our latest analysis for MSM Malaysia Holdings Berhad

Above you can see how the current ROCE for MSM Malaysia Holdings Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for MSM Malaysia Holdings Berhad .

The Trend Of ROCE

It's great to see that MSM Malaysia Holdings Berhad has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 6.5% on their capital employed. Additionally, the business is utilizing 25% less capital than it was five years ago, and taken at face value, that can mean the company needs less funds at work to get a return. MSM Malaysia Holdings Berhad could be selling under-performing assets since the ROCE is improving.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 45% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

What We Can Learn From MSM Malaysia Holdings Berhad's ROCE

From what we've seen above, MSM Malaysia Holdings Berhad has managed to increase it's returns on capital all the while reducing it's capital base. And a remarkable 107% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Like most companies, MSM Malaysia Holdings Berhad does come with some risks, and we've found 2 warning signs that you should be aware of.

While MSM Malaysia Holdings 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.