To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Although, when we looked at Malaysia Smelting Corporation Berhad (KLSE:MSC), it didn't seem to tick all of these boxes.
What Is Return On Capital Employed (ROCE)?
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. Analysts use this formula to calculate it for Malaysia Smelting Corporation Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = RM104m ÷ (RM1.4b - RM527m) (Based on the trailing twelve months to September 2024).
Thus, Malaysia Smelting Corporation Berhad has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 6.8% generated by the Metals and Mining industry.
See our latest analysis for Malaysia Smelting Corporation Berhad
In the above chart we have measured Malaysia Smelting Corporation 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 analyst report for Malaysia Smelting Corporation Berhad .
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Malaysia Smelting Corporation Berhad, we didn't gain much confidence. To be more specific, ROCE has fallen from 18% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
The Bottom Line On Malaysia Smelting Corporation Berhad's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Malaysia Smelting Corporation Berhad. And long term investors must be optimistic going forward because the stock has returned a huge 226% to shareholders in the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.