Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Melewar Industrial Group Berhad (KLSE:MELEWAR), it didn't seem to tick all of these boxes.
What is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Melewar Industrial Group Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.094 = RM51m ÷ (RM788m - RM244m) (Based on the trailing twelve months to March 2021).
So, Melewar Industrial Group Berhad has an ROCE of 9.4%. Even though it's in line with the industry average of 9.4%, it's still a low return by itself.
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.
What Can We Tell From Melewar Industrial Group Berhad's ROCE Trend?
In terms of Melewar Industrial Group Berhad's historical ROCE trend, it doesn't exactly demand attention. The company has consistently earned 9.4% for the last five years, and the capital employed within the business has risen 26% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
Our Take On Melewar Industrial Group Berhad's ROCE
Long story short, while Melewar Industrial Group Berhad has been reinvesting its capital, the returns that it's generating haven't increased. Although the market must be expecting these trends to improve because the stock has gained 66% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
Melewar Industrial Group Berhad does have some risks though, and we've spotted 3 warning signs for Melewar Industrial Group Berhad that you might be interested in.
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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