If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at MHC Plantations Bhd (KLSE:MHC) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for MHC Plantations Bhd:

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

0.17 = RM114m ÷ (RM735m - RM51m) (Based on the trailing twelve months to September 2022).

Therefore, MHC Plantations Bhd has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 11% generated by the Food industry.

View our latest analysis for MHC Plantations Bhd

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 want to delve into the historical earnings, revenue and cash flow of MHC Plantations Bhd, check out these free graphs here.

The Trend Of ROCE

MHC Plantations Bhd has not disappointed in regards to ROCE growth. We found that the returns on capital employed over the last five years have risen by 312%. The company is now earning RM0.2 per dollar of capital employed. Speaking of capital employed, the company is actually utilizing 43% less than it was five years ago, which can be indicative of a business that's improving its efficiency. MHC Plantations Bhd may be selling some assets so it's worth investigating if the business has plans for future investments to increase returns further still.

The Bottom Line

In a nutshell, we're pleased to see that MHC Plantations Bhd has been able to generate higher returns from less capital. Considering the stock has delivered 34% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

On a separate note, we've found 1 warning sign for MHC Plantations Bhd you'll probably want to know about.

While MHC Plantations Bhd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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