Yahoo Finance Capital Allocation Trends At MTAG Group Berhad (KLSE:MTAG) Aren't Ideal
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at MTAG Group Berhad (KLSE:MTAG), they do have a high ROCE, but we weren't exactly elated from how returns are trending.
Return On Capital Employed (ROCE): What Is It?
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. To calculate this metric for MTAG Group Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.21 = RM47m ÷ (RM243m - RM25m) (Based on the trailing twelve months to September 2022).
Thus, MTAG Group Berhad has an ROCE of 21%. That's a fantastic return and not only that, it outpaces the average of 10% earned by companies in a similar industry.
See our latest analysis for MTAG Group Berhad
In the above chart we have measured MTAG Group Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is MTAG Group Berhad's ROCE Trending?
In terms of MTAG Group Berhad's historical ROCE movements, the trend isn't fantastic. To be more specific, while the ROCE is still high, it's fallen from 39% where it was five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
On a side note, MTAG Group Berhad has done well to pay down its current liabilities to 10% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.
In Conclusion...
While returns have fallen for MTAG Group Berhad in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has followed suit returning a meaningful 65% to shareholders over the last three years. So should these growth trends continue, we'd be optimistic on the stock going forward.
One more thing: We've identified 2 warning signs with MTAG Group Berhad (at least 1 which is significant) , and understanding them would certainly be useful.
If you want to search for more stocks that have been earning high returns, check out this free list of stocks with solid balance sheets that are also earning high returns on equity.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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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