Capital Allocation Trends At Samchem Holdings Berhad (KLSE:SAMCHEM) Aren't Ideal

There are a few key trends to look for if we want to identify the next multi-bagger. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Samchem Holdings Berhad (KLSE:SAMCHEM), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. The formula for this calculation on Samchem Holdings Berhad is:

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

0.099 = RM34m ÷ (RM562m - RM220m) (Based on the trailing twelve months to September 2023).

Therefore, Samchem Holdings Berhad has an ROCE of 9.9%. In absolute terms, that's a low return, but it's much better than the Trade Distributors industry average of 5.6%.

View our latest analysis for Samchem Holdings Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Samchem Holdings Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Samchem Holdings Berhad, check out these free graphs here.

What Can We Tell From Samchem Holdings Berhad's ROCE Trend?

In terms of Samchem Holdings Berhad's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 29% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Samchem Holdings Berhad has decreased its current liabilities to 39% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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.

The Bottom Line On Samchem Holdings Berhad's ROCE

We're a bit apprehensive about Samchem Holdings Berhad because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Yet despite these poor fundamentals, the stock has gained a huge 109% over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Samchem Holdings Berhad does have some risks though, and we've spotted 3 warning signs for Samchem Holdings Berhad that you might be interested in.

While Samchem Holdings 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.