What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Having said that, while the ROCE is currently high for MMS Ventures Berhad (KLSE:MMSV), we aren't jumping out of our chairs because returns are decreasing.
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 MMS Ventures Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.23 = RM16m ÷ (RM82m - RM8.9m) (Based on the trailing twelve months to September 2022).
Thus, MMS Ventures Berhad has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 14% earned by companies in a similar industry.
View our latest analysis for MMS Ventures Berhad
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of MMS Ventures Berhad, check out these free graphs here.
What Can We Tell From MMS Ventures Berhad's ROCE Trend?
When we looked at the ROCE trend at MMS Ventures Berhad, we didn't gain much confidence. Historically returns on capital were even higher at 38%, 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.
On a side note, MMS Ventures Berhad has done well to pay down its current liabilities to 11% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.