Returns On Capital At Southern Score Builders Berhad (KLSE:SSB8) Paint A Concerning Picture

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Having said that, while the ROCE is currently high for Southern Score Builders Berhad (KLSE:SSB8), we aren't jumping out of our chairs because returns are decreasing.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Southern Score Builders Berhad, this is the formula:

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

0.27 = RM42m ÷ (RM238m - RM80m) (Based on the trailing twelve months to June 2024).

Thus, Southern Score Builders Berhad has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Construction industry average of 9.4%.

See our latest analysis for Southern Score Builders Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Southern Score Builders Berhad's ROCE against it's prior returns. If you'd like to look at how Southern Score Builders Berhad has performed in the past in other metrics, you can view this free graph of Southern Score Builders Berhad's past earnings, revenue and cash flow.

What Can We Tell From Southern Score Builders Berhad's ROCE Trend?

When we looked at the ROCE trend at Southern Score Builders Berhad, we didn't gain much confidence. To be more specific, while the ROCE is still high, it's fallen from 38% where it was five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Southern Score Builders Berhad has done well to pay down its current liabilities to 34% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Bottom Line

In summary, we're somewhat concerned by Southern Score Builders Berhad's diminishing returns on increasing amounts of capital. Yet despite these poor fundamentals, the stock has gained a huge 174% over the last year, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One final note, you should learn about the 2 warning signs we've spotted with Southern Score Builders Berhad (including 1 which is a bit concerning) .

Southern Score Builders Berhad is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.