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There are a few key trends to look for if we want to identify the next multi-bagger. 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, we've noticed some promising trends at Malaysia Marine and Heavy Engineering Holdings Berhad (KLSE:MHB) so let's look a bit deeper.
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 Marine and Heavy Engineering Holdings Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.014 = RM30m ÷ (RM3.4b - RM1.3b) (Based on the trailing twelve months to December 2022).
Therefore, Malaysia Marine and Heavy Engineering Holdings Berhad has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 7.2%.
Check out our latest analysis for Malaysia Marine and Heavy Engineering Holdings Berhad
Above you can see how the current ROCE for Malaysia Marine and Heavy Engineering Holdings Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Malaysia Marine and Heavy Engineering Holdings Berhad here for free.
What The Trend Of ROCE Can Tell Us
We're delighted to see that Malaysia Marine and Heavy Engineering Holdings Berhad is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 1.4%, which is always encouraging. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 38% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.