What trends should we look for it we want to identify stocks that can 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. With that in mind, we've noticed some promising trends at Melati Ehsan Holdings Berhad (KLSE:MELATI) so let's look a bit deeper.
Return On Capital Employed (ROCE): What Is It?
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 Melati Ehsan Holdings Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = RM35m ÷ (RM402m - RM91m) (Based on the trailing twelve months to February 2023).
So, Melati Ehsan Holdings Berhad has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 5.0% generated by the Construction industry.
View 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'd like to look at how Melati Ehsan Holdings Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Melati Ehsan Holdings Berhad's ROCE Trending?
Investors would be pleased with what's happening at Melati Ehsan Holdings Berhad. Over the last five years, returns on capital employed have risen substantially to 11%. Basically the business is earning more per dollar of capital invested and in addition to that, 45% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 23%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.
The Bottom Line
All in all, it's terrific to see that Melati Ehsan Holdings Berhad is reaping the rewards from prior investments and is growing its capital base. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. With that in mind, we believe the promising trends warrant this stock for further investigation.