Here's What's Concerning About Superlon Holdings Berhad's (KLSE:SUPERLN) Returns On Capital

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. Having said that, from a first glance at Superlon Holdings Berhad (KLSE:SUPERLN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Superlon Holdings Berhad, this is the formula:

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

0.088 = RM13m ÷ (RM162m - RM13m) (Based on the trailing twelve months to January 2021).

Therefore, Superlon Holdings Berhad has an ROCE of 8.8%. In absolute terms, that's a low return, but it's much better than the Building industry average of 6.2%.

See our latest analysis for Superlon Holdings Berhad

Above you can see how the current ROCE for Superlon Holdings Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Superlon Holdings Berhad here for free.

So How Is Superlon Holdings Berhad's ROCE Trending?

When we looked at the ROCE trend at Superlon Holdings Berhad, we didn't gain much confidence. Around five years ago the returns on capital were 21%, but since then they've fallen to 8.8%. And considering revenue has dropped while employing more capital, we'd be cautious. 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.

What We Can Learn From Superlon Holdings Berhad's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Superlon Holdings Berhad have fallen, meanwhile the business is employing more capital than it was five years ago. Investors must expect better things on the horizon though because the stock has risen 0.05% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you'd like to know about the risks facing Superlon Holdings Berhad, we've discovered 2 warning signs that you should be aware of.

While Superlon Holdings Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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