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What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don’t think Malaysian Pacific Industries Berhad (KLSE:MPI) has the makings of a multi-bagger going forward, but let’s have a look at why that may be.
Understanding Return On Capital Employed (ROCE)
For those that aren’t sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Malaysian Pacific Industries Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.089 = RM223m ÷ (RM3.0b – RM452m) (Based on the trailing twelve months to June 2024).
So, Malaysian Pacific Industries Berhad has a ROCE of 8.9%. On its own, that’s a low figure but it’s around the 8.3% average generated by the Semiconductor industry.
View our latest analysis for Malaysian Pacific Industries Berhad
In the above chart we have measured Malaysian Pacific Industries Berhad’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like to see what analysts are forecasting going forward, you should check out our free analyst report for Malaysian Pacific Industries Berhad .
The Trend Of ROCE
When we looked at the ROCE trend at Malaysian Pacific Industries Berhad, we didn’t gain much confidence. Over the last five years, returns on capital have decreased to 8.9% from 11% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.
The Key Takeaway
To conclude, we’ve found that Malaysian Pacific Industries Berhad is reinvesting in the business, but returns have been falling. Investors must think there’s better things to come because the stock has knocked it out of the park, delivering a 207% gain to shareholders who have held over the last five years. However, unless these underlying trends turn more positive, we wouldn’t get our hopes up too high.
If you’re still interested in Malaysian Pacific Industries Berhad it’s worth checking out our FREE intrinsic value approximation for MPI to see if it’s trading at an attractive price in other respects.
While Malaysian Pacific Industries Berhad isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.