We're Watching These Trends At Superlon Holdings Berhad (KLSE:SUPERLN)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Superlon Holdings Berhad (KLSE:SUPERLN) and its ROCE trend, we weren't exactly thrilled.

What is 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. The formula for this calculation on Superlon Holdings Berhad is:

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

0.087 = RM13m ÷ (RM161m - RM14m) (Based on the trailing twelve months to October 2020).

Thus, Superlon Holdings Berhad has an ROCE of 8.7%. In absolute terms, that's a low return, but it's much better than the Building industry average of 6.4%.

View 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.

The Trend Of ROCE

In terms of Superlon Holdings Berhad's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 19%, but since then they've fallen to 8.7%. 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.

The Bottom Line On Superlon Holdings Berhad's ROCE

In summary, we're somewhat concerned by Superlon Holdings Berhad's diminishing returns on increasing amounts of capital. Investors must expect better things on the horizon though because the stock has risen 8.0% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

On a separate note, we've found 2 warning signs for Superlon Holdings Berhad you'll probably want to know about.

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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