What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. So while Scicom (MSC) Berhad (KLSE:SCICOM) has a high ROCE right now, lets see what we can decipher from how returns are changing.

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. Analysts use this formula to calculate it for Scicom (MSC) Berhad:

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

0.31 = RM44m ÷ (RM168m - RM28m) (Based on the trailing twelve months to September 2022).

Therefore, Scicom (MSC) Berhad has an ROCE of 31%. In absolute terms that's a great return and it's even better than the IT industry average of 12%.

View our latest analysis for Scicom (MSC) Berhad

Above you can see how the current ROCE for Scicom (MSC) Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Scicom (MSC) Berhad.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Scicom (MSC) Berhad doesn't inspire confidence. While it's comforting that the ROCE is high, five years ago it was 45%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Scicom (MSC) Berhad's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Scicom (MSC) Berhad. And there could be an opportunity here if other metrics look good too, because the stock has declined 15% in the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

On a final note, we've found 2 warning signs for Scicom (MSC) Berhad that we think you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.