There are a few key trends to look for if we want to identify the next multi-bagger. 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. However, after briefly looking over the numbers, we don't think UMS-Neiken Group Berhad (KLSE:UMSNGB) has the makings of a multi-bagger going forward, but let's have a look at why that may be.
Return On Capital Employed (ROCE): What Is It?
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. The formula for this calculation on UMS-Neiken Group Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.062 = RM7.6m ÷ (RM128m - RM5.5m) (Based on the trailing twelve months to December 2022).
Therefore, UMS-Neiken Group Berhad has an ROCE of 6.2%. Ultimately, that's a low return and it under-performs the Electrical industry average of 9.3%.
See our latest analysis for UMS-Neiken Group Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for UMS-Neiken Group Berhad's ROCE against it's prior returns. If you'd like to look at how UMS-Neiken Group Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From UMS-Neiken Group Berhad's ROCE Trend?
In terms of UMS-Neiken Group Berhad's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 11% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
The Bottom Line
In summary, we're somewhat concerned by UMS-Neiken Group Berhad's diminishing returns on increasing amounts of capital. Despite the concerning underlying trends, the stock has actually gained 18% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
If you want to continue researching UMS-Neiken Group Berhad, you might be interested to know about the 1 warning sign that our analysis has discovered.