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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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 briefly looking over the numbers, we don't think Malaysia Steel Works (KL) Bhd (KLSE:MASTEEL) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding 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. To calculate this metric for Malaysia Steel Works (KL) Bhd, this is the formula:

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

0.041 = RM39m ÷ (RM1.8b - RM862m) (Based on the trailing twelve months to March 2023).

So, Malaysia Steel Works (KL) Bhd has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 7.3%.

View 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're interested in investigating Malaysia Steel Works (KL) Bhd's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Malaysia Steel Works (KL) Bhd's ROCE Trending?

When we looked at the ROCE trend at Malaysia Steel Works (KL) Bhd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 4.1% from 14% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a separate but related note, it's important to know that Malaysia Steel Works (KL) Bhd has a current liabilities to total assets ratio of 47%, which we'd consider pretty high. 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.

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

While returns have fallen for Malaysia Steel Works (KL) Bhd in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. However, despite the promising trends, the stock has fallen 45% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

On a final note, we found 4 warning signs for Malaysia Steel Works (KL) Bhd (2 make us uncomfortable) 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.