If you're looking for a multi-bagger, there's a few things to keep an eye out 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Malayan Cement Berhad's (KLSE:MCEMENT) returns on capital, so let's have a look.
Understanding 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. To calculate this metric for Malayan Cement Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.035 = RM324m ÷ (RM11b - RM1.8b) (Based on the trailing twelve months to June 2023).
So, Malayan Cement Berhad has an ROCE of 3.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 3.8%.
See our latest analysis for Malayan Cement Berhad
Above you can see how the current ROCE for Malayan Cement Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is Malayan Cement Berhad's ROCE Trending?
We're delighted to see that Malayan Cement Berhad is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 3.5% on its capital. Not only that, but the company is utilizing 189% more capital than before, but that's to be expected from a company trying to break into profitability. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.
The Key Takeaway
Long story short, we're delighted to see that Malayan Cement Berhad's reinvestment activities have paid off and the company is now profitable. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 96% return over the last five years. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
One more thing, we've spotted 1 warning sign facing Malayan Cement Berhad that you might find interesting.