There are a few key trends to look for if we want to identify the next multi-bagger. 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. With that in mind, we've noticed some promising trends at Malayan United Industries Berhad (KLSE:MUIIND) so let's look a bit deeper.
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 Malayan United Industries Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.058 = RM69m ÷ (RM1.5b - RM270m) (Based on the trailing twelve months to March 2021).
Thus, Malayan United Industries Berhad has an ROCE of 5.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 5.9%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Malayan United Industries Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Malayan United Industries Berhad, check out these free graphs here.
What Does the ROCE Trend For Malayan United Industries Berhad Tell Us?
Like most people, we're pleased that Malayan United Industries Berhad is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 5.8% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 33%. This could potentially mean that the company is selling some of its assets.
The Bottom Line
From what we've seen above, Malayan United Industries Berhad has managed to increase it's returns on capital all the while reducing it's capital base. Given the stock has declined 41% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.
Malayan United Industries Berhad does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.
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