If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So on that note, Melati Ehsan Holdings Berhad (KLSE:MELATI) looks quite promising in regards to its trends of return on capital.
Return On Capital Employed (ROCE): What Is It?
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 Melati Ehsan Holdings Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.037 = RM11m ÷ (RM401m - RM110m) (Based on the trailing twelve months to November 2023).
So, Melati Ehsan Holdings Berhad has an ROCE of 3.7%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 8.1%.
Check out our latest analysis for Melati Ehsan Holdings Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Melati Ehsan Holdings Berhad's ROCE against it's prior returns. If you're interested in investigating Melati Ehsan Holdings Berhad's past further, check out this free graph covering Melati Ehsan Holdings Berhad's past earnings, revenue and cash flow.
How Are Returns Trending?
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. Over the last five years, returns on capital employed have risen substantially to 3.7%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 36%. So we're very much inspired by what we're seeing at Melati Ehsan Holdings Berhad thanks to its ability to profitably reinvest capital.
One more thing to note, Melati Ehsan Holdings Berhad has decreased current liabilities to 27% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
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 Melati Ehsan Holdings Berhad has. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 22% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.