Southern Cable Group Berhad (KLSE:SCGBHD) Might Be Having Difficulty Using Its Capital Effectively

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Southern Cable Group Berhad (KLSE:SCGBHD) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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 Southern Cable Group Berhad is:

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

0.16 = RM57m ÷ (RM615m - RM268m) (Based on the trailing twelve months to March 2024).

So, Southern Cable Group Berhad has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Electrical industry average of 10% it's much better.

View our latest analysis for Southern Cable Group Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Southern Cable Group Berhad's ROCE against it's prior returns. If you're interested in investigating Southern Cable Group Berhad's past further, check out this free graph covering Southern Cable Group Berhad's past earnings, revenue and cash flow.

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

In terms of Southern Cable Group Berhad's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 16% from 24% five years ago. 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. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, Southern Cable Group Berhad has done well to pay down its current liabilities to 44% 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. And the stock has followed suit returning a meaningful 94% to shareholders over the last three years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Like most companies, Southern Cable Group Berhad does come with some risks, and we've found 2 warning signs that you should be aware of.

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.

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