The Returns On Capital At Magni-Tech Industries Berhad (KLSE:MAGNI) Don't Inspire Confidence

editorial-team@simplywallst.com (Simply Wall St)

Wed, May 8, 2024, 6:09 PM2 min read

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Magni-Tech Industries Berhad (KLSE:MAGNI) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Magni-Tech Industries Berhad:

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

0.15 = RM128m ÷ (RM1.0b - RM127m) (Based on the trailing twelve months to January 2024).

So, Magni-Tech Industries Berhad has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 11% generated by the Luxury industry.

See our latest analysis for Magni-Tech Industries Berhad

In the above chart we have measured Magni-Tech Industries 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 analyst report for Magni-Tech Industries Berhad .

What Does the ROCE Trend For Magni-Tech Industries Berhad Tell Us?

On the surface, the trend of ROCE at Magni-Tech Industries Berhad doesn't inspire confidence. Over the last five years, returns on capital have decreased to 15% from 22% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

What We Can Learn From Magni-Tech Industries Berhad's ROCE

In summary, Magni-Tech Industries Berhad is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 66% over the last five years. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we found 2 warning signs for Magni-Tech Industries Berhad (1 is a bit unpleasant) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and 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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Understanding Return On Capital Employed (ROCE)

What Does the ROCE Trend For Magni-Tech Industries Berhad Tell Us?

What We Can Learn From Magni-Tech Industries Berhad's ROCE

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