Here's What's Concerning About Maxis Berhad's (KLSE:MAXIS) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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 Maxis Berhad (KLSE:MAXIS) and its ROCE trend, we weren't exactly thrilled.

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 Maxis Berhad:

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

0.12 = RM2.0b ÷ (RM22b - RM5.2b) (Based on the trailing twelve months to September 2021).

Therefore, Maxis Berhad has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 8.2% generated by the Wireless Telecom industry.

Check out our latest analysis for Maxis Berhad

Above you can see how the current ROCE for Maxis Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Maxis Berhad here for free.

What Does the ROCE Trend For Maxis Berhad Tell Us?

When we looked at the ROCE trend at Maxis Berhad, we didn't gain much confidence. Around five years ago the returns on capital were 22%, but since then they've fallen to 12%. However it looks like Maxis Berhad might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line On Maxis Berhad's ROCE

In summary, Maxis Berhad is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 22% in the last five years. Therefore based on the analysis done in this article, we don't think Maxis Berhad has the makings of a multi-bagger.

One more thing, we've spotted 2 warning signs facing Maxis Berhad that you might find interesting.

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.