What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Muda Holdings Berhad (KLSE:MUDA) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
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. To calculate this metric for Muda Holdings Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.023 = RM40m ÷ (RM2.5b - RM771m) (Based on the trailing twelve months to September 2022).
So, Muda Holdings Berhad has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Packaging industry average of 11%.
View our latest analysis for Muda Holdings Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Muda Holdings Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Muda Holdings Berhad, check out these free graphs here.
What Does the ROCE Trend For Muda Holdings Berhad Tell Us?
In terms of Muda Holdings Berhad's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 4.0%, but since then they've fallen to 2.3%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
Our Take On Muda Holdings Berhad's ROCE
While returns have fallen for Muda Holdings Berhad in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. Furthermore the stock has climbed 55% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we'd be optimistic on the stock going forward.
Muda Holdings Berhad does have some risks, we noticed 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.