Returns On Capital Are Showing Encouraging Signs At Mestron Holdings Berhad (KLSE:MESTRON)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 Mestron Holdings Berhad's (KLSE:MESTRON) returns on capital, so let's have a 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. The formula for this calculation on Mestron Holdings Berhad is:

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

0.069 = RM11m ÷ (RM189m - RM27m) (Based on the trailing twelve months to September 2024).

Thus, Mestron Holdings Berhad has an ROCE of 6.9%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.9%.

See our latest analysis for Mestron Holdings Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Mestron Holdings Berhad's ROCE against it's prior returns. If you're interested in investigating Mestron Holdings Berhad's past further, check out this free graph covering Mestron Holdings Berhad's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The fact that Mestron Holdings Berhad is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 6.9% on its capital. In addition to that, Mestron Holdings Berhad is employing 124% more capital than previously which is expected of a company that's trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

What We Can Learn From Mestron Holdings Berhad's ROCE

In summary, it's great to see that Mestron Holdings Berhad has managed to break into profitability and is continuing to reinvest in its business. Since the stock has returned a staggering 144% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

If you'd like to know about the risks facing Mestron Holdings Berhad, we've discovered 2 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.