If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should 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. 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 Sime Darby Berhad (KLSE:SIME) 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. 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)
0.08 = RM2.5b ÷ (RM52b - RM20b) (Based on the trailing twelve months to March 2024).
So, Sime Darby Berhad has an ROCE of 8.0%. On its own that's a low return, but compared to the average of 6.6% generated by the Industrials industry, it's much better.
View our latest analysis for Sime Darby Berhad
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 to see what analysts are forecasting going forward, you should check out our free analyst report for Sime Darby Berhad .
So How Is Sime Darby Berhad's ROCE Trending?
There are better returns on capital out there than what we're seeing at Sime Darby Berhad. The company has employed 99% more capital in the last five years, and the returns on that capital have remained stable at 8.0%. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
The Bottom Line
As we've seen above, Sime Darby Berhad's returns on capital haven't increased but it is reinvesting in the business. Since the stock has gained an impressive 51% over the last five years, investors must think there's better things to come. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
Like most companies, Sime Darby Berhad does come with some risks, and we've found 1 warning sign that you should be aware of.
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.
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About KLSE:SIME
Sime Darby Berhad
An investment holding company, operates in the industrial, motors, and other businesses in Malaysia, China, Australia, and internationally.
Very undervalued with adequate balance sheet.
