If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Mi Technovation Berhad (KLSE:MI), it didn't seem to tick all of these boxes.
What Is Return On Capital Employed (ROCE)?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Mi Technovation Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.067 = RM74m ÷ (RM1.2b - RM93m) (Based on the trailing twelve months to March 2023).
Thus, Mi Technovation Berhad has an ROCE of 6.7%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 14%.
Check out our latest analysis for Mi Technovation Berhad
In the above chart we have measured Mi Technovation 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 Mi Technovation Berhad here for free.
What Does the ROCE Trend For Mi Technovation Berhad Tell Us?
On the surface, the trend of ROCE at Mi Technovation Berhad doesn't inspire confidence. Around five years ago the returns on capital were 32%, but since then they've fallen to 6.7%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
The Key Takeaway
In summary, Mi Technovation Berhad is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And investors appear hesitant that the trends will pick up because the stock has fallen 45% in the last three years. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.
On a separate note, we've found 1 warning sign for Mi Technovation Berhad you'll probably want to know about.