There are a few key trends to look for if we want to identify the next multi-bagger. 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. With that in mind, we've noticed some promising trends at Mudajaya Group Berhad (KLSE:MUDAJYA) so let's look a bit deeper.
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 Mudajaya Group Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.031 = RM20m ÷ (RM965m - RM322m) (Based on the trailing twelve months to June 2022).
So, Mudajaya Group Berhad has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Construction industry average of 5.4%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Mudajaya Group Berhad's ROCE against it's prior returns. If you'd like to look at how Mudajaya Group Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Does the ROCE Trend For Mudajaya Group Berhad Tell Us?
We're delighted to see that Mudajaya Group Berhad is reaping rewards from its investments and has now broken into profitability. Historically the company was generating losses but as we can see from the latest figures referenced above, they're now earning 3.1% on their capital employed. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 40%. The reduction could indicate that the company is selling some assets, and considering returns are up, they appear to be selling the right ones.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 33%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Mudajaya Group Berhad has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
What We Can Learn From Mudajaya Group Berhad's ROCE
In the end, Mudajaya Group Berhad has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has dived 80% over the last five years, there may be other factors affecting the company's prospects. Regardless, we think the underlying fundamentals warrant this stock for further investigation.
Mudajaya Group Berhad does have some risks, we noticed 4 warning signs (and 1 which is concerning) we think you should know about.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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