Returns On Capital Signal Tricky Times Ahead For Malaysia Steel Works (KL) Bhd (KLSE:MASTEEL)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Malaysia Steel Works (KL) Bhd (KLSE:MASTEEL), we don't think it's current trends fit the mold of a multi-bagger.

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 Malaysia Steel Works (KL) Bhd is:

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

0.049 = RM46m ÷ (RM1.7b - RM770m) (Based on the trailing twelve months to June 2022).

Thus, Malaysia Steel Works (KL) Bhd has an ROCE of 4.9%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 13%.

Check out our latest analysis for Malaysia Steel Works (KL) Bhd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Malaysia Steel Works (KL) Bhd's ROCE against it's prior returns. 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.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Malaysia Steel Works (KL) Bhd, we didn't gain much confidence. Around five years ago the returns on capital were 8.0%, but since then they've fallen to 4.9%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Malaysia Steel Works (KL) Bhd's current liabilities are still rather high at 45% 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Malaysia Steel Works (KL) Bhd's ROCE

In summary, Malaysia Steel Works (KL) Bhd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 61% in the last five years. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.

On a final note, we found 4 warning signs for Malaysia Steel Works (KL) Bhd (2 don't sit too well with us) you should be aware of.

While Malaysia Steel Works (KL) 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. 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.