We Like These Underlying Return On Capital Trends At SMIS Corporation Berhad (KLSE:SMISCOR)

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at SMIS Corporation Berhad (KLSE:SMISCOR) so let's look a bit deeper.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for SMIS Corporation Berhad, this is the formula:

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

0.033 = RM2.5m ÷ (RM107m - RM31m) (Based on the trailing twelve months to June 2022).

Therefore, SMIS Corporation Berhad has an ROCE of 3.3%. Even though it's in line with the industry average of 3.4%, it's still a low return by itself.

View our latest analysis for SMIS Corporation 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 SMIS Corporation Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For SMIS Corporation Berhad Tell Us?

Shareholders will be relieved that SMIS Corporation Berhad has broken into profitability. The company now earns 3.3% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. 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. Because in the end, a business can only get so efficient.

In Conclusion...

To sum it up, SMIS Corporation Berhad is collecting higher returns from the same amount of capital, and that's impressive. Considering the stock has delivered 7.3% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.

SMIS Corporation Berhad does have some risks though, and we've spotted 1 warning sign for SMIS Corporation Berhad that you might be interested in.

While SMIS Corporation 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.

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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.