What Do The Returns On Capital At Mieco Chipboard Berhad (KLSE:MIECO) Tell Us?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. However, after investigating Mieco Chipboard Berhad (KLSE:MIECO), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

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 Mieco Chipboard Berhad, this is the formula:

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

0.018 = RM8.0m ÷ (RM648m - RM198m) (Based on the trailing twelve months to December 2020).

So, Mieco Chipboard Berhad has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Forestry industry average of 3.8%.

See our latest analysis for Mieco Chipboard Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Mieco Chipboard Berhad's ROCE against it's prior returns. If you'd like to look at how Mieco Chipboard 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 Mieco Chipboard Berhad's ROCE Trend?

When we looked at the ROCE trend at Mieco Chipboard Berhad, we didn't gain much confidence. Around five years ago the returns on capital were 7.3%, but since then they've fallen to 1.8%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Mieco Chipboard Berhad have fallen, meanwhile the business is employing more capital than it was five years ago. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 179%. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

On a final note, we found 3 warning signs for Mieco Chipboard Berhad (2 are a bit concerning) you should be aware of.

While Mieco Chipboard Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. 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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