Stock Analysis

Returns On Capital At 7-Eleven Malaysia Holdings Berhad (KLSE:SEM) Paint An Interesting Picture

KLSE:SEM
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What trends should we look for it we want to identify stocks that can multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at 7-Eleven Malaysia Holdings Berhad (KLSE:SEM) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.10 = RM114m ÷ (RM1.9b - RM841m) (Based on the trailing twelve months to June 2020).

Thus, 7-Eleven Malaysia Holdings Berhad has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Consumer Retailing industry average of 9.1%.

See our latest analysis for 7-Eleven Malaysia Holdings Berhad

roce
KLSE:SEM Return on Capital Employed November 18th 2020

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.

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

When we looked at the ROCE trend at 7-Eleven Malaysia Holdings Berhad, we didn't gain much confidence. Around five years ago the returns on capital were 40%, but since then they've fallen to 10%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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 44% 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. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE. Keep in mind 44% is still pretty high, so those risks are still somewhat prevalent.

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

Bringing it all together, while we're somewhat encouraged by 7-Eleven Malaysia Holdings Berhad's reinvestment in its own business, we're aware that returns are shrinking. And with the stock having returned a mere 7.2% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for 7-Eleven Malaysia Holdings Berhad (of which 1 can't be ignored!) that you should know about.

While 7-Eleven Malaysia 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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