Stock Analysis

Melewar Industrial Group Berhad (KLSE:MELEWAR) May Have Issues Allocating Its Capital

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KLSE:MELEWAR
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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. Having said that, from a first glance at Melewar Industrial Group Berhad (KLSE:MELEWAR) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. 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)

0.045 = RM24m ÷ (RM735m - RM210m) (Based on the trailing twelve months to December 2020).

Thus, Melewar Industrial Group Berhad has an ROCE of 4.5%. In absolute terms, that's a low return but it's around the Metals and Mining industry average of 5.0%.

See our latest analysis for Melewar Industrial Group Berhad

roce
KLSE:MELEWAR Return on Capital Employed April 19th 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 Can We Tell From Melewar Industrial Group Berhad's ROCE Trend?

In terms of Melewar Industrial Group Berhad's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 5.8%, but since then they've fallen to 4.5%. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

The Bottom Line

In summary, we're somewhat concerned by Melewar Industrial Group Berhad's diminishing returns on increasing amounts of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 51% return over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a separate note, we've found 2 warning signs for Melewar Industrial Group Berhad you'll probably want to know about.

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