Mr D.I.Y. Group (M) Berhad's (KLSE:MRDIY) Returns On Capital Not Reflecting Well On The Business

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, while the ROCE is currently high for Mr D.I.Y. Group (M) Berhad (KLSE:MRDIY), we aren't jumping out of our chairs because returns are decreasing.

Understanding 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. Analysts use this formula to calculate it for Mr D.I.Y. Group (M) Berhad:

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

0.26 = RM605m ÷ (RM2.8b - RM490m) (Based on the trailing twelve months to March 2022).

Therefore, Mr D.I.Y. Group (M) Berhad has an ROCE of 26%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 12%.

View our latest analysis for Mr D.I.Y. Group (M) Berhad

Above you can see how the current ROCE for Mr D.I.Y. Group (M) Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Mr D.I.Y. Group (M) Berhad.

What The Trend Of ROCE Can Tell Us

In terms of Mr D.I.Y. Group (M) Berhad's historical ROCE movements, the trend isn't fantastic. To be more specific, while the ROCE is still high, it's fallen from 47% where it was five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Mr D.I.Y. Group (M) Berhad has done well to pay down its current liabilities to 17% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Mr D.I.Y. Group (M) Berhad's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Mr D.I.Y. Group (M) Berhad is reinvesting for growth and has higher sales as a result. And there could be an opportunity here if other metrics look good too, because the stock has declined 13% in the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

Mr D.I.Y. Group (M) Berhad could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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.