Returns On Capital Are Showing Encouraging Signs At Malayan Cement Berhad (KLSE:MCEMENT)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. With that in mind, we've noticed some promising trends at Malayan Cement Berhad (KLSE:MCEMENT) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Malayan Cement Berhad, this is the formula:

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

0.052 = RM478m ÷ (RM11b - RM1.6b) (Based on the trailing twelve months to September 2023).

Therefore, Malayan Cement Berhad has an ROCE of 5.2%. On its own that's a low return, but compared to the average of 3.4% generated by the Basic Materials industry, it's much better.

Check out our latest analysis for Malayan Cement Berhad

In the above chart we have measured Malayan Cement Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Malayan Cement Berhad here for free.

How Are Returns Trending?

The fact that Malayan Cement Berhad is now generating some pre-tax profits from its prior investments is very encouraging. The company was generating losses five years ago, but now it's earning 5.2% which is a sight for sore eyes. In addition to that, Malayan Cement Berhad is employing 198% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, Malayan Cement Berhad has decreased current liabilities to 15% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Malayan Cement Berhad has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From Malayan Cement Berhad's ROCE

Long story short, we're delighted to see that Malayan Cement Berhad's reinvestment activities have paid off and the company is now profitable. And a remarkable 141% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

One more thing, we've spotted 1 warning sign facing Malayan Cement Berhad that you might find interesting.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.