If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Malaysia Airports Holdings Berhad’s (KLSE:AIRPORT) 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 Malaysia Airports Holdings Berhad, this is the formula:

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

0.12 = RM1.9b ÷ (RM20b – RM3.1b) (Based on the trailing twelve months to September 2023).

Therefore, Malaysia Airports Holdings Berhad has an ROCE of 12%. That’s a pretty standard return and it’s in line with the industry average of 12%.

See our latest analysis for Malaysia Airports Holdings Berhad

In the above chart we have measured Malaysia Airports Holdings Berhad’s prior ROCE against its prior performance, but the future is arguably more important. If you’d like, you can check out the forecasts from the analysts covering Malaysia Airports Holdings Berhad here for free.

The Trend Of ROCE

Malaysia Airports Holdings Berhad has not disappointed with their ROCE growth. The figures show that over the last five years, ROCE has grown 135% whilst employing roughly the same amount of capital. So it’s likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn’t changed considerably. 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.

Story continues

The Key Takeaway

As discussed above, Malaysia Airports Holdings Berhad appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. So researching this company further and determining whether or not these trends will continue seems justified.

Before jumping to any conclusions though, we need to know what value we’re getting for the current share price. That’s where you can check out our FREE intrinsic value estimation that compares the share price and estimated value.

While Malaysia Airports Holdings 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.