What trends should we look for it we want to identify stocks that can 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Matang Berhad (KLSE:MATANG) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Matang Berhad:

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

0.014 = RM3.5m ÷ (RM253m - RM3.0m) (Based on the trailing twelve months to March 2023).

Therefore, Matang Berhad has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Food industry average of 8.5%.

View our latest analysis for Matang Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Matang Berhad's ROCE against it's prior returns. If you're interested in investigating Matang Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Matang Berhad's ROCE Trending?

Unfortunately, the trend isn't great with ROCE falling from 3.0% five years ago, while capital employed has grown 32%. Usually this isn't ideal, but given Matang Berhad conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. Matang Berhad probably hasn't received a full year of earnings yet from the new funds it raised, so these figures should be taken with a grain of salt.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Matang Berhad's reinvestment in its own business, we're aware that returns are shrinking. And investors may be recognizing these trends since the stock has only returned a total of 35% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.

Matang Berhad does have some risks, we noticed 5 warning signs (and 1 which is significant) we think you should know about.

While Matang Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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