Returns On Capital At Malaysian Pacific Industries Berhad (KLSE:MPI) Paint A Concerning Picture

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Malaysian Pacific Industries Berhad (KLSE:MPI) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Malaysian Pacific Industries Berhad is:

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

0.028 = RM70m ÷ (RM3.0b - RM446m) (Based on the trailing twelve months to December 2023).

Thus, Malaysian Pacific Industries Berhad has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 6.2%.

See our latest analysis for Malaysian Pacific Industries Berhad

In the above chart we have measured Malaysian Pacific Industries Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Malaysian Pacific Industries Berhad .

So How Is Malaysian Pacific Industries Berhad's ROCE Trending?

When we looked at the ROCE trend at Malaysian Pacific Industries Berhad, we didn't gain much confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 2.8%. 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.

The Bottom Line On Malaysian Pacific Industries Berhad's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Malaysian Pacific Industries Berhad have fallen, meanwhile the business is employing more capital than it was five years ago. Yet despite these poor fundamentals, the stock has gained a huge 219% over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you'd like to know about the risks facing Malaysian Pacific Industries Berhad, we've discovered 1 warning sign that you should be aware of.

While Malaysian Pacific Industries Berhad isn't earning the highest return, check out this free list of companies that are 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.