Returns Are Gaining Momentum At Microlink Solutions Berhad (KLSE:MICROLN)
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Microlink Solutions Berhad (KLSE:MICROLN) looks quite promising in regards to its trends of return on capital.
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 Microlink Solutions Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = RM37m ÷ (RM304m - RM84m) (Based on the trailing twelve months to September 2022).
Thus, Microlink Solutions Berhad has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 13% generated by the Software industry.
Check out our latest analysis for Microlink Solutions Berhad
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Microlink Solutions Berhad's past further, check out this free graph of past earnings, revenue and cash flow.
So How Is Microlink Solutions Berhad's ROCE Trending?
We like the trends that we're seeing from Microlink Solutions Berhad. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 17%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 95%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 28%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Microlink Solutions Berhad has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.
In Conclusion...
In summary, it's great to see that Microlink Solutions Berhad can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 524% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.
Like most companies, Microlink Solutions Berhad does come with some risks, and we've found 2 warning signs that 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.
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