Return Trends At SAM Engineering & Equipment (M) Berhad (KLSE:SAM) Aren't Appealing

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. That's why when we briefly looked at SAM Engineering & Equipment (M) Berhad's (KLSE:SAM) ROCE trend, we were pretty happy with what we saw.

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

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 SAM Engineering & Equipment (M) Berhad:

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

0.15 = RM145m ÷ (RM1.8b - RM803m) (Based on the trailing twelve months to September 2023).

Thus, SAM Engineering & Equipment (M) Berhad has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 8.8% it's much better.

View our latest analysis for SAM Engineering & Equipment (M) Berhad

Above you can see how the current ROCE for SAM Engineering & Equipment (M) Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering SAM Engineering & Equipment (M) Berhad here for free.

So How Is SAM Engineering & Equipment (M) Berhad's ROCE Trending?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has employed 75% more capital in the last five years, and the returns on that capital have remained stable at 15%. 15% is a pretty standard return, and it provides some comfort knowing that SAM Engineering & Equipment (M) Berhad has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

Another point to note, we noticed the company has increased current liabilities over the last five years. This is intriguing because if current liabilities hadn't increased to 46% of total assets, this reported ROCE would probably be less than15% because total capital employed would be higher.The 15% ROCE could be even lower if current liabilities weren't 46% of total assets, because the the formula would show a larger base of total capital employed. Additionally, this high level of current liabilities isn't ideal because it means the company's suppliers (or short-term creditors) are effectively funding a large portion of the business.

The Bottom Line On SAM Engineering & Equipment (M) Berhad's ROCE

The main thing to remember is that SAM Engineering & Equipment (M) Berhad has proven its ability to continually reinvest at respectable rates of return. And long term investors would be thrilled with the 129% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

If you'd like to know about the risks facing SAM Engineering & Equipment (M) Berhad, we've discovered 1 warning sign 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.