Stock Analysis

Is 7-Eleven Malaysia Holdings Berhad (KLSE:SEM) Likely To Turn Things Around?

KLSE:SEM
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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at 7-Eleven Malaysia Holdings Berhad (KLSE:SEM) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What is 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. Analysts use this formula to calculate it for 7-Eleven Malaysia Holdings Berhad:

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

0.12 = RM119m ÷ (RM1.9b - RM852m) (Based on the trailing twelve months to September 2020).

Therefore, 7-Eleven Malaysia Holdings Berhad has an ROCE of 12%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Consumer Retailing industry average of 9.7%.

See our latest analysis for 7-Eleven Malaysia Holdings Berhad

roce
KLSE:SEM Return on Capital Employed February 24th 2021

In the above chart we have measured 7-Eleven Malaysia Holdings Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering 7-Eleven Malaysia Holdings Berhad here for free.

How Are Returns Trending?

In terms of 7-Eleven Malaysia Holdings Berhad's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 41% over the last five years. However it looks like 7-Eleven Malaysia Holdings Berhad might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, 7-Eleven Malaysia Holdings Berhad has done well to pay down its current liabilities to 45% of total assets. So we could link some of this to the decrease in ROCE. 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.

The Bottom Line On 7-Eleven Malaysia Holdings Berhad's ROCE

In summary, 7-Eleven Malaysia Holdings Berhad is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Additionally, the stock's total return to shareholders over the last five years has been flat, which isn't too surprising. Therefore based on the analysis done in this article, we don't think 7-Eleven Malaysia Holdings Berhad has the makings of a multi-bagger.

One final note, you should learn about the 3 warning signs we've spotted with 7-Eleven Malaysia Holdings Berhad (including 1 which makes us a bit uncomfortable) .

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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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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