What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in United Malacca Berhad's (KLSE:UMCCA) 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. Analysts use this formula to calculate it for United Malacca Berhad:

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

0.04 = RM67m ÷ (RM1.8b - RM168m) (Based on the trailing twelve months to January 2024).

Thus, United Malacca Berhad has an ROCE of 4.0%. Ultimately, that's a low return and it under-performs the Food industry average of 6.9%.

View our latest analysis for United Malacca Berhad

In the above chart we have measured United Malacca 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 United Malacca Berhad for free.

What Does the ROCE Trend For United Malacca Berhad Tell Us?

Shareholders will be relieved that United Malacca Berhad has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 4.0%, which is always encouraging. While returns have increased, the amount of capital employed by United Malacca Berhad has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

The Bottom Line

In summary, we're delighted to see that United Malacca Berhad has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has only returned 7.1% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

On a final note, we've found 2 warning signs for United Malacca Berhad that we think you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.