What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Speaking of which, we noticed some great changes in Malaysia Airports Holdings Berhad's (KLSE:AIRPORT) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for Malaysia Airports Holdings Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.055 = RM935m ÷ (RM21b - RM4.2b) (Based on the trailing twelve months to September 2022).
So, Malaysia Airports Holdings Berhad has an ROCE of 5.5%. In absolute terms, that's a low return and it also under-performs the Infrastructure industry average of 20%.
Check out our latest analysis for Malaysia Airports Holdings Berhad
In the above chart we have measured Malaysia Airports Holdings Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is Malaysia Airports Holdings Berhad's ROCE Trending?
Malaysia Airports Holdings Berhad is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 31% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 20% of the business, which is more than it was five years ago. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.