SMIS Corporation Berhad's (KLSE:SMISCOR) Returns On Capital Are Heading Higher

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. So on that note, SMIS Corporation Berhad (KLSE:SMISCOR) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for SMIS Corporation Berhad:

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

0.051 = RM5.4m ÷ (RM131m - RM24m) (Based on the trailing twelve months to March 2024).

Thus, SMIS Corporation Berhad has an ROCE of 5.1%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 10%.

See our latest analysis for SMIS Corporation Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for SMIS Corporation Berhad's ROCE against it's prior returns. If you'd like to look at how SMIS Corporation Berhad has performed in the past in other metrics, you can view this free graph of SMIS Corporation Berhad's past earnings, revenue and cash flow.

How Are Returns Trending?

Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. Over the last five years, returns on capital employed have risen substantially to 5.1%. The amount of capital employed has increased too, by 25%. So we're very much inspired by what we're seeing at SMIS Corporation Berhad thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 19%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

What We Can Learn From SMIS Corporation Berhad's ROCE

To sum it up, SMIS Corporation Berhad has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has returned a solid 57% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. In light of that, we think it's worth looking further into this stock because if SMIS Corporation Berhad can keep these trends up, it could have a bright future ahead.

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

While SMIS Corporation Berhad isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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