Stock Analysis

Sime Darby Berhad (KLSE:SIME) Is Doing The Right Things To Multiply Its Share Price

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Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, Sime Darby Berhad (KLSE:SIME) looks quite promising in regards to its trends of return on capital.

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 Sime Darby Berhad:

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

0.083 = RM1.5b ÷ (RM31b - RM12b) (Based on the trailing twelve months to December 2022).

Therefore, Sime Darby Berhad has an ROCE of 8.3%. Even though it's in line with the industry average of 8.3%, it's still a low return by itself.

View our latest analysis for Sime Darby Berhad

KLSE:SIME Return on Capital Employed March 15th 2023

Above you can see how the current ROCE for Sime Darby Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Sime Darby Berhad.

How Are Returns Trending?

Sime Darby Berhad is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 126% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

Our Take On Sime Darby Berhad's ROCE

To sum it up, Sime Darby Berhad is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has only returned 5.3% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

One more thing to note, we've identified 1 warning sign with Sime Darby Berhad and understanding it should be part of your investment process.

While Sime Darby 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.

Valuation is complex, but we're helping make it simple.

Find out whether Sime Darby Berhad is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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