Stock Analysis

7-Eleven Malaysia Holdings Berhad (KLSE:SEM) Will Want To Turn Around Its Return Trends

KLSE:SEM
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If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 7-Eleven Malaysia Holdings Berhad (KLSE:SEM) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for 7-Eleven Malaysia Holdings Berhad, this is the formula:

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

0.14 = RM214m ÷ (RM2.7b - RM1.1b) (Based on the trailing twelve months to December 2022).

Therefore, 7-Eleven Malaysia Holdings Berhad has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 8.9% generated by the Consumer Retailing industry.

Check out our latest analysis for 7-Eleven Malaysia Holdings Berhad

roce
KLSE:SEM Return on Capital Employed March 18th 2023

Above you can see how the current ROCE for 7-Eleven Malaysia 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 7-Eleven Malaysia Holdings Berhad here for free.

What Can We Tell From 7-Eleven Malaysia Holdings Berhad's ROCE Trend?

In terms of 7-Eleven Malaysia Holdings Berhad's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 56%, but since then they've fallen to 14%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, 7-Eleven Malaysia Holdings Berhad has done well to pay down its current liabilities to 41% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

What We Can Learn From 7-Eleven Malaysia Holdings Berhad's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for 7-Eleven Malaysia Holdings Berhad. And the stock has followed suit returning a meaningful 48% to shareholders over the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

Like most companies, 7-Eleven Malaysia Holdings Berhad does come with some risks, and we've found 1 warning sign that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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Find out whether 7-Eleven Malaysia Holdings Berhad is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.