Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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 investigating UMS-Neiken Group Berhad (KLSE:UMSNGB), we don't think it's current trends fit the mold of a multi-bagger.
Return On Capital Employed (ROCE): What Is It?
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. To calculate this metric for UMS-Neiken Group Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.024 = RM2.9m ÷ (RM129m - RM5.3m) (Based on the trailing twelve months to June 2023).
Thus, UMS-Neiken Group Berhad has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Electrical industry average of 11%.
View our latest analysis for UMS-Neiken 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're interested in investigating UMS-Neiken Group Berhad's past further, check out this free graph of past earnings, revenue and cash flow.
What Can We Tell From UMS-Neiken Group Berhad's ROCE Trend?
When we looked at the ROCE trend at UMS-Neiken Group Berhad, we didn't gain much confidence. To be more specific, ROCE has fallen from 9.2% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.
What We Can Learn From UMS-Neiken Group Berhad's ROCE
We're a bit apprehensive about UMS-Neiken Group Berhad because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Despite the concerning underlying trends, the stock has actually gained 8.2% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.