What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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 Muhibbah Engineering (M) Bhd (KLSE:MUHIBAH) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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. Analysts use this formula to calculate it for Muhibbah Engineering (M) Bhd:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.012 = RM25m ÷ (RM3.4b - RM1.4b) (Based on the trailing twelve months to March 2023).

Thus, Muhibbah Engineering (M) Bhd has an ROCE of 1.2%. Ultimately, that's a low return and it under-performs the Construction industry average of 5.9%.

View our latest analysis for Muhibbah Engineering (M) Bhd

Above you can see how the current ROCE for Muhibbah Engineering (M) Bhd compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Muhibbah Engineering (M) Bhd here for free.

How Are Returns Trending?

On the surface, the trend of ROCE at Muhibbah Engineering (M) Bhd doesn't inspire confidence. Around five years ago the returns on capital were 4.7%, but since then they've fallen to 1.2%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Another thing to note, Muhibbah Engineering (M) Bhd has a high ratio of current liabilities to total assets of 42%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Muhibbah Engineering (M) Bhd's ROCE

In summary, Muhibbah Engineering (M) Bhd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 75% in the last five years. Therefore based on the analysis done in this article, we don't think Muhibbah Engineering (M) Bhd has the makings of a multi-bagger.