Malaysia Smelting Corporation Berhad (KLSE:MSC) Knows How To Allocate Capital Effectively

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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 Malaysia Smelting Corporation Berhad's (KLSE:MSC) 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. To calculate this metric for Malaysia Smelting Corporation Berhad, this is the formula:

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

0.35 = RM283m ÷ (RM1.4b - RM575m) (Based on the trailing twelve months to June 2022).

Thus, Malaysia Smelting Corporation Berhad has an ROCE of 35%. That's a fantastic return and not only that, it outpaces the average of 13% earned by companies in a similar industry.

View our latest analysis for Malaysia Smelting Corporation Berhad

Above you can see how the current ROCE for Malaysia Smelting Corporation Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Malaysia Smelting Corporation Berhad here for free.

What Does the ROCE Trend For Malaysia Smelting Corporation Berhad Tell Us?

Malaysia Smelting Corporation Berhad is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 35%. 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 112%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

On a separate but related note, it's important to know that Malaysia Smelting Corporation Berhad has a current liabilities to total assets ratio of 42%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Malaysia Smelting Corporation Berhad has. And with a respectable 80% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to know some of the risks facing Malaysia Smelting Corporation Berhad we've found 3 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

Malaysia Smelting Corporation Berhad is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.