Returns On Capital Are Showing Encouraging Signs At Melewar Industrial Group Berhad (KLSE:MELEWAR)

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, we've noticed some promising trends at Melewar Industrial Group Berhad (KLSE:MELEWAR) 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 Melewar Industrial Group Berhad, this is the formula:

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

0.14 = RM86m ÷ (RM838m - RM216m) (Based on the trailing twelve months to March 2022).

Thus, Melewar Industrial Group Berhad has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Metals and Mining industry average of 13%.

Check out our latest analysis for Melewar Industrial Group Berhad

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.

So How Is Melewar Industrial Group Berhad's ROCE Trending?

The fact that Melewar Industrial Group 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 14% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Melewar Industrial Group Berhad is utilizing 58% more capital than it was five years ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 26%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

Our Take On Melewar Industrial Group Berhad's ROCE

In summary, it's great to see that Melewar Industrial Group Berhad has managed to break into profitability and is continuing to reinvest in its business. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. So researching this company further and determining whether or not these trends will continue seems justified.

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 2 can't be ignored!) that you should know about.

While Melewar Industrial Group Berhad 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.