If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Sime Darby Berhad (KLSE:SIME) and its ROCE trend, we weren't exactly thrilled.
Understanding 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. 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)
0.082 = RM2.5b ÷ (RM48b - RM17b) (Based on the trailing twelve months to September 2024).
Therefore, Sime Darby Berhad has an ROCE of 8.2%. Even though it's in line with the industry average of 7.9%, it's still a low return by itself.
See 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're interested, you can view the analysts predictions in our free analyst report for Sime Darby Berhad .
What The Trend Of ROCE Can Tell Us
In terms of Sime Darby Berhad's historical ROCE trend, it doesn't exactly demand attention. The company has employed 79% more capital in the last five years, and the returns on that capital have remained stable at 8.2%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
The Bottom Line On Sime Darby Berhad's ROCE
Long story short, while Sime Darby Berhad has been reinvesting its capital, the returns that it's generating haven't increased. And investors may be recognizing these trends since the stock has only returned a total of 37% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
One more thing to note, we've identified 2 warning signs with Sime Darby Berhad and understanding these should be part of your investment process.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.
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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.
About KLSE:SIME
Sime Darby Berhad
An investment holding company, operates in the industrial, motors, and other businesses in Malaysia, China, Australia, and internationally.
Undervalued with excellent balance sheet and pays a dividend.
