To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Melewar Industrial Group Berhad's (KLSE:MELEWAR) returns on capital, so let's have a look.
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. Analysts use this formula to calculate it for Melewar Industrial Group Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = RM80m ÷ (RM894m - RM314m) (Based on the trailing twelve months to September 2021).
So, Melewar Industrial Group Berhad has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Metals and Mining industry average of 11% it's much better.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Melewar Industrial Group Berhad's ROCE against it's prior returns. If you're interested in investigating Melewar Industrial Group Berhad's past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
We like the trends that we're seeing from Melewar Industrial Group Berhad. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 14%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 30%. So we're very much inspired by what we're seeing at Melewar Industrial Group Berhad thanks to its ability to profitably reinvest capital.
The Key Takeaway
To sum it up, Melewar Industrial Group Berhad has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Considering the stock has delivered 4.7% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Melewar Industrial Group Berhad (of which 1 is concerning!) that you should know about.
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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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.
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