Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So when we looked at Master-Pack Group Berhad (KLSE:MASTER) and its trend of ROCE, we really liked what we saw.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Master-Pack Group Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.14 = RM20m ÷ (RM156m - RM16m) (Based on the trailing twelve months to June 2022).
Thus, Master-Pack Group Berhad has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Packaging industry average of 11% it's much better.
View our latest analysis for Master-Pack Group Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Master-Pack Group Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Master-Pack Group Berhad, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
We like the trends that we're seeing from Master-Pack Group Berhad. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 14%. The amount of capital employed has increased too, by 77%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.
One more thing to note, Master-Pack Group Berhad has decreased current liabilities to 10% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.
The Bottom Line
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Master-Pack Group Berhad has. And a remarkable 223% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Master-Pack Group Berhad can keep these trends up, it could have a bright future ahead.