What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. However, after briefly looking over the numbers, we don't think My E.G. Services Berhad (KLSE:MYEG) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. Analysts use this formula to calculate it for My E.G. Services Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.18 = RM355m ÷ (RM2.3b - RM342m) (Based on the trailing twelve months to September 2022).
Therefore, My E.G. Services Berhad has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 12% generated by the IT industry.
See our latest analysis for My E.G. Services Berhad
Above you can see how the current ROCE for My E.G. Services 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 My E.G. Services Berhad here for free.
So How Is My E.G. Services Berhad's ROCE Trending?
On the surface, the trend of ROCE at My E.G. Services Berhad doesn't inspire confidence. Around five years ago the returns on capital were 33%, but since then they've fallen to 18%. 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.
The Bottom Line On My E.G. Services Berhad's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that My E.G. Services Berhad is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 15% over the last five years, so there might be an opportunity here for astute investors. 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 1 warning sign for My E.G. Services Berhad that we think you should be aware of.