Malaysia Steel Works (KL) Bhd (KLSE:MASTEEL) Is Experiencing Growth In Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Malaysia Steel Works (KL) Bhd (KLSE:MASTEEL) 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 Malaysia Steel Works (KL) Bhd is:

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

0.079 = RM66m ÷ (RM1.7b - RM822m) (Based on the trailing twelve months to September 2021).

Therefore, Malaysia Steel Works (KL) Bhd has an ROCE of 7.9%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 11%.

See our latest analysis for Malaysia Steel Works (KL) 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 Malaysia Steel Works (KL) Bhd, check out these free graphs here.

How Are Returns Trending?

We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 7.9%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 36%. So we're very much inspired by what we're seeing at Malaysia Steel Works (KL) Bhd thanks to its ability to profitably reinvest capital.

On a side note, Malaysia Steel Works (KL) Bhd's current liabilities are still rather high at 49% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Malaysia Steel Works (KL) Bhd's ROCE

In summary, it's great to see that Malaysia Steel Works (KL) Bhd can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And since the stock has fallen 19% over the last five years, there might be an opportunity here. With that in mind, we believe the promising trends warrant this stock for further investigation.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for Malaysia Steel Works (KL) Bhd (of which 3 don't sit too well with us!) that you should know about.

While Malaysia Steel Works (KL) Bhd 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.

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.

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