What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Ultimately, this demonstrates that it’s a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in MHC Plantations Bhd’s (KLSE:MHC) returns on capital, so let’s have a look.
Understanding 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. To calculate this metric for MHC Plantations Bhd, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.069 = RM48m ÷ (RM738m – RM49m) (Based on the trailing twelve months to December 2023).
Therefore, MHC Plantations Bhd has an ROCE of 6.9%. On its own that’s a low return on capital but it’s in line with the industry’s average returns of 6.9%.
View our latest analysis for MHC Plantations Bhd
Historical performance is a great place to start when researching a stock so above you can see the gauge for MHC Plantations Bhd’s ROCE against it’s prior returns. If you’re interested in investigating MHC Plantations Bhd’s past further, check out this free graph covering MHC Plantations Bhd’s past earnings, revenue and cash flow.
So How Is MHC Plantations Bhd’s ROCE Trending?
MHC Plantations Bhd is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 121% in that same time. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company’s efficiencies. It’s worth looking deeper into this though because while it’s great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
The Key Takeaway
To sum it up, MHC Plantations Bhd is collecting higher returns from the same amount of capital, and that’s impressive. Since the stock has returned a staggering 112% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.
If you’d like to know about the risks facing MHC Plantations Bhd, we’ve discovered 2 warning signs that you should be aware of.
While MHC Plantations Bhd 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.
