The Returns On Capital At Mr D.I.Y. Group (M) Berhad (KLSE:MRDIY) Don't Inspire Confidence

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. 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. Looking at Mr D.I.Y. Group (M) Berhad (KLSE:MRDIY), it does have a high ROCE right now, but lets see how returns are trending.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Mr D.I.Y. Group (M) Berhad, this is the formula:

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

0.28 = RM684m ÷ (RM3.1b - RM594m) (Based on the trailing twelve months to September 2022).

Thus, Mr D.I.Y. Group (M) Berhad has an ROCE of 28%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 18%.

See 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.

How Are Returns Trending?

On the surface, the trend of ROCE at Mr D.I.Y. Group (M) Berhad doesn't inspire confidence. While it's comforting that the ROCE is high, five years ago it was 43%. 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. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Mr D.I.Y. Group (M) Berhad's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Mr D.I.Y. Group (M) Berhad. These growth trends haven't led to growth returns though, since the stock has fallen 17% over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

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.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.