Shareholders Would Enjoy A Repeat Of Gas Malaysia Berhad's (KLSE:GASMSIA) Recent Growth In Returns

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. And in light of that, the trends we're seeing at Gas Malaysia Berhad's (KLSE:GASMSIA) look very promising so lets take a look.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Gas Malaysia Berhad, this is the formula:

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

0.21 = RM295m ÷ (RM2.6b - RM1.3b) (Based on the trailing twelve months to December 2020).

Thus, Gas Malaysia Berhad has an ROCE of 21%. In absolute terms that's a great return and it's even better than the Gas Utilities industry average of 7.7%.

Check out our latest analysis for Gas Malaysia Berhad

In the above chart we have measured Gas Malaysia Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Gas Malaysia Berhad here for free.

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from Gas Malaysia Berhad. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 21%. Basically the business is earning more per dollar of capital invested and in addition to that, 22% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a side note, Gas Malaysia Berhad's current liabilities are still rather high at 48% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

In Conclusion...

All in all, it's terrific to see that Gas Malaysia Berhad is reaping the rewards from prior investments and is growing its capital base. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 41% return over the last five years. Therefore, we think it would be worth your time to check if these trends are going to continue.

Gas Malaysia Berhad does have some risks though, and we've spotted 1 warning sign for Gas Malaysia Berhad that you might be interested in.

If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning 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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