Should You Be Impressed By Spring Art Holdings Berhad's (KLSE:SPRING) Returns on Capital?

What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. However, after briefly looking over the numbers, we don't think Spring Art Holdings Berhad (KLSE:SPRING) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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 Spring Art Holdings Berhad, this is the formula:

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

0.099 = RM7.7m ÷ (RM86m - RM8.4m) (Based on the trailing twelve months to September 2020).

So, Spring Art Holdings Berhad has an ROCE of 9.9%. In absolute terms, that's a low return but it's around the Consumer Durables industry average of 12%.

View our latest analysis for Spring Art Holdings Berhad

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Spring Art Holdings Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Spring Art Holdings Berhad Tell Us?

When we looked at the ROCE trend at Spring Art Holdings Berhad, we didn't gain much confidence. Around four years ago the returns on capital were 41%, but since then they've fallen to 9.9%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Spring Art Holdings Berhad's reinvestment in its own business, we're aware that returns are shrinking. Since the stock has gained an impressive 46% over the last year, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

Spring Art Holdings Berhad does have some risks, we noticed 4 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

While Spring Art 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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This article by Simply Wall St is general in nature. 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.
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