Should You Be Impressed By Mega First Corporation Berhad's (KLSE:MFCB) Returns on Capital?

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. That's why when we briefly looked at Mega First Corporation Berhad's (KLSE:MFCB) ROCE trend, we were pretty happy with what we saw.

Return On Capital Employed (ROCE): What is it?

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 Mega First Corporation Berhad:

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

0.15 = RM411m ÷ (RM3.1b - RM272m) (Based on the trailing twelve months to December 2020).

Thus, Mega First Corporation Berhad has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 7.2% generated by the Renewable Energy industry.

See our latest analysis for Mega First Corporation Berhad

Above you can see how the current ROCE for Mega First Corporation 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 Mega First Corporation Berhad here for free.

So How Is Mega First Corporation Berhad's ROCE Trending?

While the returns on capital are good, they haven't moved much. The company has consistently earned 15% for the last five years, and the capital employed within the business has risen 174% in that time. Since 15% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

Our Take On Mega First Corporation Berhad's ROCE

In the end, Mega First Corporation Berhad has proven its ability to adequately reinvest capital at good rates of return. And the stock has done incredibly well with a 328% return over the last five years, so long term investors are no doubt ecstatic with that result. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

Mega First Corporation Berhad does have some risks though, and we've spotted 2 warning signs for Mega First Corporation Berhad that you might be interested in.

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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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