Be Wary Of Southern Cable Group Berhad (KLSE:SCGBHD) And Its Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think Southern Cable Group Berhad (KLSE:SCGBHD) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is 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. To calculate this metric for Southern Cable Group Berhad, this is the formula:

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

0.12 = RM37m ÷ (RM591m - RM272m) (Based on the trailing twelve months to September 2023).

Thus, Southern Cable Group Berhad has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 11% generated by the Electrical industry.

See our latest analysis for Southern Cable Group Berhad

In the above chart we have measured Southern Cable Group Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Southern Cable Group Berhad Tell Us?

On the surface, the trend of ROCE at Southern Cable Group Berhad doesn't inspire confidence. To be more specific, ROCE has fallen from 24% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Southern Cable Group Berhad has done well to pay down its current liabilities to 46% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Bottom Line On Southern Cable Group Berhad's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Southern Cable Group Berhad is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 12% over the last three years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

If you want to continue researching Southern Cable Group Berhad, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Southern Cable Group 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.