There Are Reasons To Feel Uneasy About Swang Chai Chuan's (HKG:2321) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Swang Chai Chuan (HKG:2321) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Swang Chai Chuan is:

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

0.12 = RM35m ÷ (RM392m - RM112m) (Based on the trailing twelve months to December 2024).

Thus, Swang Chai Chuan has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Consumer Retailing industry average of 9.4% it's much better.

See our latest analysis for Swang Chai Chuan

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

How Are Returns Trending?

When we looked at the ROCE trend at Swang Chai Chuan, we didn't gain much confidence. To be more specific, ROCE has fallen from 20% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a related note, Swang Chai Chuan has decreased its current liabilities to 29% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Swang Chai Chuan's ROCE

To conclude, we've found that Swang Chai Chuan is reinvesting in the business, but returns have been falling. Since the stock has gained an impressive 13% over the last year, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Like most companies, Swang Chai Chuan does come with some risks, and we've found 1 warning sign that you should be aware of.

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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.