If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Sime Darby Berhad (KLSE:SIME) and its trend of ROCE, we really liked what we saw.
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)
0.089 = RM1.7b ÷ (RM30b - RM11b) (Based on the trailing twelve months to September 2022).
Therefore, Sime Darby Berhad has an ROCE of 8.9%. In absolute terms, that's a low return and it also under-performs the Industrials industry average of 12%.
In the above chart we have measured Sime Darby Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Sime Darby Berhad here for free.
What Does the ROCE Trend For Sime Darby Berhad Tell Us?
You'd find it hard not to be impressed with the ROCE trend at Sime Darby Berhad. The figures show that over the last five years, returns on capital have grown by 533%. The company is now earning RM0.09 per dollar of capital employed. In regards to capital employed, Sime Darby Berhad appears to been achieving more with less, since the business is using 56% less capital to run its operation. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.
The Key Takeaway
In the end, Sime Darby Berhad has proven it's capital allocation skills are good with those higher returns from less amount of capital. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 26% to shareholders. So exploring more about this stock could uncover a good opportunity, if the valuation and other metrics stack up.
If you want to continue researching Sime Darby Berhad, you might be interested to know about the 1 warning sign that our analysis has discovered.
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.
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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.