The Returns At SAM Engineering & Equipment (M) Berhad (KLSE:SAM) Aren't Growing

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So, when we ran our eye over SAM Engineering & Equipment (M) Berhad's (KLSE:SAM) trend of ROCE, we liked what we saw.

What is 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. 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)

0.13 = RM82m ÷ (RM905m - RM260m) (Based on the trailing twelve months to December 2020).

So, SAM Engineering & Equipment (M) Berhad has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 9.7% generated by the Machinery industry.

View our latest analysis for SAM Engineering & Equipment (M) 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'd like to look at how SAM Engineering & Equipment (M) Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 13% and the business has deployed 48% more capital into its operations. 13% is a pretty standard return, and it provides some comfort knowing that SAM Engineering & Equipment (M) Berhad has consistently earned this amount. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

On another note, while the change in ROCE trend might not scream for attention, it's interesting that the current liabilities have actually gone up over the last five years. This is intriguing because if current liabilities hadn't increased to 29% of total assets, this reported ROCE would probably be less than13% because total capital employed would be higher.The 13% ROCE could be even lower if current liabilities weren't 29% of total assets, because the the formula would show a larger base of total capital employed. With that in mind, just be wary if this ratio increases in the future, because if it gets particularly high, this brings with it some new elements of risk.

What We Can Learn From SAM Engineering & Equipment (M) Berhad's ROCE

In the end, SAM Engineering & Equipment (M) Berhad has proven its ability to adequately reinvest capital at good rates of return. However, over the last five years, the stock has only delivered a 24% return to shareholders who held over that period. So to determine if SAM Engineering & Equipment (M) Berhad is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

SAM Engineering & Equipment (M) Berhad does have some risks though, and we've spotted 2 warning signs for SAM Engineering & Equipment (M) Berhad that you might be interested in.

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. 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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