To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Malaysia Steel Works (KL) Bhd (KLSE:MASTEEL) and its trend of ROCE, we really liked what we saw.
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 Malaysia Steel Works (KL) Bhd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.046 = RM43m ÷ (RM2.1b - RM1.2b) (Based on the trailing twelve months to September 2024).
Thus, Malaysia Steel Works (KL) Bhd has an ROCE of 4.6%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 6.8%.
See our latest analysis for Malaysia Steel Works (KL) Bhd
Historical performance is a great place to start when researching a stock so above you can see the gauge for Malaysia Steel Works (KL) Bhd's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Malaysia Steel Works (KL) Bhd.
So How Is Malaysia Steel Works (KL) Bhd's ROCE Trending?
Malaysia Steel Works (KL) Bhd has broken into the black (profitability) and we're sure it's a sight for sore eyes. The company now earns 4.6% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Malaysia Steel Works (KL) Bhd has remained flat over the period. 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.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 55% of the business, which is more than it was five years ago. And with current liabilities at those levels, that's pretty high.