If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. With that in mind, we've noticed some promising trends at MSM Malaysia Holdings Berhad (KLSE:MSM) so let's look a bit deeper.
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. Analysts use this formula to calculate it for MSM Malaysia Holdings Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.044 = RM77m ÷ (RM3.1b - RM1.3b) (Based on the trailing twelve months to March 2024).
Thus, MSM Malaysia Holdings Berhad has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the Food industry average of 7.4%.
Check out our latest analysis for MSM Malaysia Holdings Berhad
Above you can see how the current ROCE for MSM Malaysia Holdings Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for MSM Malaysia Holdings Berhad .
What Can We Tell From MSM Malaysia Holdings Berhad's ROCE Trend?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. We found that the returns on capital employed over the last five years have risen by 47%. That's a very favorable trend because this means that the company is earning more per dollar of capital that's being employed. In regards to capital employed, MSM Malaysia Holdings Berhad appears to been achieving more with less, since the business is using 31% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
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. The current liabilities has increased to 43% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. And with current liabilities at those levels, that's pretty high.