Finding a company that has the potential to grow significantly is not easy. But it is possible if we look at some key financial metrics. In a perfect world, we would like to see a company invest more capital in its business and, ideally, the returns generated from that capital also increase. Simply put, these types of companies are compound interest machines, meaning that they continually reinvest their profits at ever-increasing returns. According to research by Malaysia Smelting Corporation Berhad (KLSE:MSC) we do not believe that the current trends fit the pattern of a multi-bagger.
What is return on capital employed (ROCE)?
For those who don’t know what ROCE is, it measures the amount of pre-tax profit a company can generate with the capital employed in its business. The formula for this calculation at Malaysia Smelting Corporation Berhad is:
Return on capital = earnings before interest and taxes (EBIT) ÷ (total assets – current liabilities)
0.11 = RM96 million ÷ (RM1.4 billion – RM503 million) (Based on the last twelve months to June 2024).
Therefore, Malaysia Smelting Corporation Berhad has a ROCE of 11%. This is a normal return in itself, but it is much better than the 6.7% achieved in the metals and mining industry.
Check out our latest analysis for Malaysia Smelting Corporation Berhad
In the chart above, we have compared Malaysia Smelting Corporation Berhad’s past ROCE with its past performance, but the future is arguably more important. If you want to know what analysts are forecasting for the future, you should check out our free analyst report for Malaysia Smelting Corporation Berhad.
What does the ROCE trend tell us for Malaysia Smelting Corporation Berhad?
As for Malaysia Smelting Corporation Berhad’s historical ROCE movements, the trend is not fantastic. Over the last five years, the return on capital has dropped to 11% from 15% five years ago. On the other hand, the company has deployed more capital over the last year without a corresponding improvement in sales, which may suggest that these investments are for the longer term. It may take some time for the company to see a change in the returns from these investments.
Our assessment of the ROCE of Malaysia Smelting Corporation Berhad
In conclusion, we noted that while Malaysia Smelting Corporation Berhad is reinvesting in the business, earnings are declining. However, the stock has provided long-term shareholders with an incredible 247% return over the past five years, so the market is optimistic about the future. If the underlying trends continue, we would not expect the company to be a multibagger in the future.
Finally, we found 1 warning sign for Malaysia Smelting Corporation Berhad that we think you should know.
If you want to look for solid companies with high returns, check out this free List of companies with good balance sheets and impressive return on equity.
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This Simply Wall St article is of a general nature. We comment solely on the basis of historical data and analyst forecasts, using an unbiased methodology. Our articles do not constitute financial advice. It is not a recommendation to buy or sell any stock and does not take into account your objectives or financial situation. Our goal is to provide you with long-term analysis based on fundamental data. Note that our analysis may not take into account the latest price-sensitive company announcements or qualitative materials. Simply Wall St does not hold any of the stocks mentioned.
