Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, MBM Resources Berhad (KLSE:MBMR) looks quite promising in regards to its trends of return on capital.
Understanding 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 MBM Resources Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0092 = RM21m ÷ (RM2.4b - RM162m) (Based on the trailing twelve months to June 2022).
So, MBM Resources Berhad has an ROCE of 0.9%. In absolute terms, that's a low return and it also under-performs the Retail Distributors industry average of 8.2%.
See our latest analysis for MBM Resources Berhad
In the above chart we have measured MBM Resources 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 MBM Resources Berhad here for free.
The Trend Of ROCE
Shareholders will be relieved that MBM Resources Berhad has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 0.9% on its capital. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.
The Bottom Line On MBM Resources Berhad's ROCE
To bring it all together, MBM Resources Berhad has done well to increase the returns it's generating from its capital employed. And a remarkable 120% total return over the last five years tells us that investors are expecting more good things to come in the future. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.
MBM Resources Berhad does have some risks though, and we've spotted 1 warning sign for MBM Resources Berhad that you might be interested in.