Stock Analysis

Has Melewar Industrial Group Berhad (KLSE:MELEWAR) Got What It Takes To Become A Multi-Bagger?

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KLSE:MELEWAR
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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Melewar Industrial Group Berhad (KLSE:MELEWAR) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Melewar Industrial Group Berhad, this is the formula:

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

0.0024 = RM1.2m ÷ (RM639m - RM131m) (Based on the trailing twelve months to September 2020).

So, Melewar Industrial Group Berhad has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 2.9%.

View our latest analysis for Melewar Industrial Group Berhad

roce
KLSE:MELEWAR Return on Capital Employed January 18th 2021

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'd like to look at how Melewar Industrial Group Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Melewar Industrial Group Berhad Tell Us?

In terms of Melewar Industrial Group Berhad's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 3.5% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Melewar Industrial Group Berhad has decreased its current liabilities to 21% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Melewar Industrial Group Berhad have fallen, meanwhile the business is employing more capital than it was five years ago. Since the stock has skyrocketed 136% over the last five years, it looks like investors have high expectations of the stock. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we've found 4 warning signs for Melewar Industrial Group Berhad that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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