Investors Shouldn't Overlook Samchem Holdings Berhad's (KLSE:SAMCHEM) Impressive Returns On Capital

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Samchem Holdings Berhad's (KLSE:SAMCHEM) returns on capital, so let's have a look.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Samchem Holdings Berhad:

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

0.36 = RM113m ÷ (RM640m - RM330m) (Based on the trailing twelve months to March 2022).

Thus, Samchem Holdings Berhad has an ROCE of 36%. In absolute terms that's a great return and it's even better than the Trade Distributors industry average of 6.4%.

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're interested in investigating Samchem Holdings Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

Samchem Holdings Berhad is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 36%. Basically the business is earning more per dollar of capital invested and in addition to that, 120% more capital is being employed now too. So we're very much inspired by what we're seeing at Samchem Holdings 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 52%, 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. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

What We Can Learn From Samchem Holdings Berhad's ROCE

To sum it up, Samchem Holdings Berhad has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And a remarkable 124% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Samchem Holdings Berhad can keep these trends up, it could have a bright future ahead.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Samchem Holdings Berhad (of which 2 make us uncomfortable!) that you should know about.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets 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.