What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Having said that, from a first glance at Unimech Group Berhad (KLSE:UNIMECH) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
What Is Return On Capital Employed (ROCE)?
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. To calculate this metric for Unimech Group Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.10 = RM45m ÷ (RM554m - RM118m) (Based on the trailing twelve months to June 2024).
Thus, Unimech Group Berhad has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 7.9% it's much better.
See our latest analysis for Unimech Group Berhad
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Unimech Group Berhad has performed in the past in other metrics, you can view this free graph of Unimech Group Berhad's past earnings, revenue and cash flow.
How Are Returns Trending?
When we looked at the ROCE trend at Unimech Group Berhad, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 10% from 13% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
On a side note, Unimech Group Berhad has done well to pay down its current liabilities to 21% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.