What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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. So on that note, MHC Plantations Bhd (KLSE:MHC) looks quite promising in regards to its trends of return on capital.
Understanding 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. To calculate this metric for MHC Plantations Bhd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.078 = RM53m ÷ (RM728m - RM50m) (Based on the trailing twelve months to June 2024).
So, MHC Plantations Bhd has an ROCE of 7.8%. In absolute terms, that's a low return but it's around the Food industry average of 8.9%.
View our latest analysis for MHC Plantations Bhd
Historical performance is a great place to start when researching a stock so above you can see the gauge for MHC Plantations Bhd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of MHC Plantations Bhd.
What Can We Tell From MHC Plantations Bhd's ROCE Trend?
MHC Plantations Bhd is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 470% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
The Key Takeaway
In summary, we're delighted to see that MHC Plantations Bhd has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And a remarkable 115% total return over the last five years tells us that investors are expecting more good things to come in the future. 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.