What We Make Of Mesiniaga Berhad's (KLSE:MSNIAGA) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Mesiniaga Berhad's (KLSE:MSNIAGA) returns on capital, so let's have a look.

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 Mesiniaga Berhad is:

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

0.066 = RM7.9m ÷ (RM177m - RM57m) (Based on the trailing twelve months to September 2020).

Thus, Mesiniaga Berhad has an ROCE of 6.6%. In absolute terms, that's a low return but it's around the IT industry average of 7.8%.

Check out our latest analysis for Mesiniaga Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Mesiniaga Berhad's ROCE against it's prior returns. If you're interested in investigating Mesiniaga Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We're delighted to see that Mesiniaga Berhad is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 6.6%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

What We Can Learn From Mesiniaga Berhad's ROCE

In summary, we're delighted to see that Mesiniaga Berhad has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And with a respectable 83% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. In light of that, we think it's worth looking further into this stock because if Mesiniaga Berhad can keep these trends up, it could have a bright future ahead.

Like most companies, Mesiniaga Berhad does come with some risks, and we've found 2 warning signs that you should be aware of.

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. 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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