What We Make Of Malakoff Corporation Berhad's (KLSE:MALAKOF) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. So when we looked at Malakoff Corporation Berhad (KLSE:MALAKOF) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Malakoff Corporation Berhad:

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

0.064 = RM1.4b ÷ (RM25b - RM2.8b) (Based on the trailing twelve months to September 2020).

Therefore, Malakoff Corporation Berhad has an ROCE of 6.4%. In absolute terms, that's a low return but it's around the Renewable Energy industry average of 7.3%.

See our latest analysis for Malakoff Corporation Berhad

In the above chart we have measured Malakoff Corporation Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Malakoff Corporation Berhad.

What The Trend Of ROCE Can Tell Us

You'd find it hard not to be impressed with the ROCE trend at Malakoff Corporation Berhad. The figures show that over the last five years, returns on capital have grown by 34%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. Speaking of capital employed, the company is actually utilizing 24% less than it was five years ago, which can be indicative of a business that's improving its efficiency. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

What We Can Learn From Malakoff Corporation Berhad's ROCE

In summary, it's great to see that Malakoff Corporation Berhad has been able to turn things around and earn higher returns on lower amounts of capital. Given the stock has declined 25% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. So researching this company further and determining whether or not these trends will continue seems justified.

Malakoff Corporation Berhad does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are a bit concerning...

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. 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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