MSM Malaysia Holdings Berhad (KLSE:MSM) Is Experiencing Growth In Returns On Capital

If you’re not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it’s a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in MSM Malaysia Holdings Berhad’s (KLSE:MSM) returns on capital, so let’s have a look.

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. The formula for this calculation on MSM Malaysia Holdings Berhad is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

0.023 = RM38m ÷ (RM2.9b – RM1.2b) (Based on the trailing twelve months to September 2024).

Thus, MSM Malaysia Holdings Berhad has an ROCE of 2.3%. Ultimately, that’s a low return and it under-performs the Food industry average of 8.3%.

Check out our latest analysis for MSM Malaysia Holdings Berhad

Above you can see how the current ROCE for MSM Malaysia Holdings Berhad compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’d like to see what analysts are forecasting going forward, you should check out our free analyst report for MSM Malaysia Holdings Berhad .

It’s great to see that MSM Malaysia Holdings Berhad has started to generate some pre-tax earnings from prior investments. Historically the company was generating losses but as we can see from the latest figures referenced above, they’re now earning 2.3% 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 30%. MSM Malaysia Holdings Berhad could be selling under-performing assets since the ROCE is improving.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 43% of the business, which is more than it was five years ago. And with current liabilities at those levels, that’s pretty high.

In the end, MSM Malaysia Holdings Berhad has proven it’s capital allocation skills are good with those higher returns from less amount of capital. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 36% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.