Investors Will Want United Malacca Berhad's (KLSE:UMCCA) Growth In ROCE To Persist

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 when we looked at United Malacca Berhad (KLSE:UMCCA) and its trend of ROCE, we really liked what we saw.

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. The formula for this calculation on United Malacca Berhad is:

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

0.065 = RM107m ÷ (RM1.8b - RM151m) (Based on the trailing twelve months to October 2021).

Therefore, United Malacca 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 8.5%.

See our latest analysis for United Malacca Berhad

Above you can see how the current ROCE for United Malacca 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 report for United Malacca Berhad.

What Does the ROCE Trend For United Malacca Berhad Tell Us?

United Malacca Berhad has not disappointed in regards to ROCE growth. The data shows that returns on capital have increased by 174% over the trailing five years. 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, United Malacca Berhad appears to been achieving more with less, since the business is using 20% less capital to run its operation. United Malacca Berhad may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

What We Can Learn From United Malacca Berhad's ROCE

In a nutshell, we're pleased to see that United Malacca Berhad has been able to generate higher returns from less capital. Considering the stock has delivered 8.9% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So with that in mind, we think the stock deserves further research.

On a final note, we found 2 warning signs for United Malacca Berhad (1 makes us a bit uncomfortable) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.