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There are a few key trends to look for if we want to identify the next multi-bagger. 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 when we looked at MISC Berhad (KLSE:MISC) and its trend of ROCE, we really liked what we saw.
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 MISC Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.04 = RM2.3b ÷ (RM66b - RM8.4b) (Based on the trailing twelve months to September 2022).
So, MISC Berhad has an ROCE of 4.0%. In absolute terms, that's a low return and it also under-performs the Shipping industry average of 11%.
See our latest analysis for MISC Berhad
In the above chart we have measured MISC Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for MISC Berhad.
What Does the ROCE Trend For MISC Berhad Tell Us?
While in absolute terms it isn't a high ROCE, it's promising to see that it has been moving in the right direction. Over the last five years, returns on capital employed have risen substantially to 4.0%. Basically the business is earning more per dollar of capital invested and in addition to that, 32% 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.
Our Take On MISC Berhad's ROCE
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 MISC Berhad has. Considering the stock has delivered 27% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
One more thing, we've spotted 2 warning signs facing MISC Berhad that you might find interesting.
While MISC Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.