If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Looking at Mr D.I.Y. Group (M) Berhad (KLSE:MRDIY), it does have a high ROCE right now, but lets see how returns are trending.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Mr D.I.Y. Group (M) Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.27 = RM759m ÷ (RM3.4b - RM611m) (Based on the trailing twelve months to June 2023).
Therefore, Mr D.I.Y. Group (M) Berhad has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 15%.
See our latest analysis for Mr D.I.Y. Group (M) Berhad
In the above chart we have measured Mr D.I.Y. Group (M) Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Mr D.I.Y. Group (M) Berhad here for free.
What Does the ROCE Trend For Mr D.I.Y. Group (M) Berhad Tell Us?
On the surface, the trend of ROCE at Mr D.I.Y. Group (M) Berhad doesn't inspire confidence. Historically returns on capital were even higher at 40%, but they have dropped over the last five years. 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 Mr D.I.Y. Group (M) Berhad's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Mr D.I.Y. Group (M) Berhad is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 14% over the last three years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.
If you're still interested in Mr D.I.Y. Group (M) Berhad it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.