Can Sern Kou Resources Berhad (KLSE:SERNKOU) Continue To Grow Its Returns On Capital?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. So when we looked at Sern Kou Resources Berhad (KLSE:SERNKOU) and its trend of ROCE, we really liked what we saw.

Understanding 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 Sern Kou Resources Berhad, this is the formula:

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

0.11 = RM23m ÷ (RM278m - RM74m) (Based on the trailing twelve months to September 2020).

Thus, Sern Kou Resources Berhad has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 12% generated by the Consumer Durables industry.

See our latest analysis for Sern Kou Resources Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sern Kou Resources Berhad's ROCE against it's prior returns. If you're interested in investigating Sern Kou Resources Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Sern Kou Resources Berhad's ROCE Trending?

The trends we've noticed at Sern Kou Resources Berhad are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 11%. The amount of capital employed has increased too, by 191%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

In Conclusion...

In summary, it's great to see that Sern Kou Resources Berhad can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 326% to shareholders over the last five years, it looks like investors are recognizing these changes. Therefore, we think it would be worth your time to check if these trends are going to continue.

If you want to continue researching Sern Kou Resources Berhad, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Sern Kou Resources 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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