There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. However, after briefly looking over the numbers, we don't think Melati Ehsan Holdings Berhad (KLSE:MELATI) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Understanding Return On Capital Employed (ROCE)
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the 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)
0.018 = RM5.6m ÷ (RM407m - RM100m) (Based on the trailing twelve months to November 2024).
So, Melati Ehsan Holdings Berhad has an ROCE of 1.8%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 10.0%.
Check out 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're interested in investigating Melati Ehsan Holdings Berhad's past further, check out this free graph covering Melati Ehsan Holdings Berhad's past earnings, revenue and cash flow .
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Melati Ehsan Holdings Berhad doesn't inspire confidence. Around five years ago the returns on capital were 4.3%, but since then they've fallen to 1.8%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
On a side note, Melati Ehsan Holdings Berhad has done well to pay down its current liabilities to 25% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.