If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Amway (Malaysia) Holdings Berhad (KLSE:AMWAY) looks great, so lets see what the trend can tell us.
Return On Capital Employed (ROCE): What Is It?
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. Analysts use this formula to calculate it for Amway (Malaysia) Holdings Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.40 = RM98m ÷ (RM554m - RM313m) (Based on the trailing twelve months to March 2023).
Thus, Amway (Malaysia) Holdings Berhad has an ROCE of 40%. In absolute terms that's a great return and it's even better than the Specialty Retail industry average of 19%.
Check out our latest analysis for Amway (Malaysia) Holdings Berhad
In the above chart we have measured Amway (Malaysia) Holdings 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 Amway (Malaysia) Holdings Berhad here for free.
What The Trend Of ROCE Can Tell Us
We like the trends that we're seeing from Amway (Malaysia) Holdings Berhad. The data shows that returns on capital have increased substantially over the last five years to 40%. The amount of capital employed has increased too, by 24%. 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.
Another thing to note, Amway (Malaysia) Holdings Berhad has a high ratio of current liabilities to total assets of 57%. 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.
The Bottom Line
To sum it up, Amway (Malaysia) Holdings Berhad has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. So researching this company further and determining whether or not these trends will continue seems justified.