Returns On Capital Are Showing Encouraging Signs At MSM Malaysia Holdings Berhad (KLSE:MSM)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. With that in mind, we've noticed some promising trends at MSM Malaysia Holdings Berhad (KLSE:MSM) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

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 MSM Malaysia Holdings Berhad is:

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

0.036 = RM62m ÷ (RM3.0b - RM1.3b) (Based on the trailing twelve months to June 2024).

So, MSM Malaysia Holdings Berhad has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Food industry average of 8.9%.

Check out 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, you can check out the forecasts from the analysts covering MSM Malaysia Holdings Berhad for free.

So How Is MSM Malaysia Holdings Berhad's ROCE Trending?

It's nice to see that ROCE is headed in the right direction, even if it is still relatively low. The figures show that over the last five years, returns on capital have grown by 277%. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. In regards to capital employed, MSM Malaysia Holdings Berhad appears to been achieving more with less, since the business is using 34% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 42% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.

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. Since the stock has only returned 40% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. 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 MSM Malaysia Holdings Berhad (including 1 which is potentially serious) .

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.