What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Unimech Group Berhad's (KLSE:UNIMECH) returns on capital, so let's have a look.

What Is 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 Unimech Group Berhad, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.13 = RM49m ÷ (RM511m - RM130m) (Based on the trailing twelve months to June 2022).

Therefore, Unimech Group Berhad has an ROCE of 13%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Machinery industry average of 12%.

See our latest analysis for Unimech Group Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Unimech Group Berhad's ROCE against it's prior returns. If you're interested in investigating Unimech Group Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

Unimech Group Berhad is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 13%. Basically the business is earning more per dollar of capital invested and in addition to that, 29% more capital is being employed now too. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

Our Take On Unimech Group Berhad's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Unimech Group Berhad has. Since the stock has returned a solid 67% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. 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.

Like most companies, Unimech Group Berhad does come with some risks, and we've found 2 warning signs that you should be aware of.