Capital Allocation Trends At Excel Force MSC Berhad (KLSE:EFORCE) Aren't Ideal

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Excel Force MSC Berhad (KLSE:EFORCE), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Excel Force MSC Berhad:

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

0.11 = RM12m ÷ (RM117m - RM9.1m) (Based on the trailing twelve months to December 2022).

Thus, Excel Force MSC Berhad has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 13% generated by the Software industry.

Check out our latest analysis for Excel Force MSC Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Excel Force MSC Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Excel Force MSC Berhad, check out these free graphs here.

What Does the ROCE Trend For Excel Force MSC Berhad Tell Us?

When we looked at the ROCE trend at Excel Force MSC Berhad, we didn't gain much confidence. To be more specific, ROCE has fallen from 15% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for Excel Force MSC Berhad have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 17% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing to note, we've identified 3 warning signs with Excel Force MSC Berhad and understanding them should be part of your investment process.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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.