Here's What's Concerning About Berjaya Sports Toto Berhad's (KLSE:BJTOTO) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Berjaya Sports Toto Berhad (KLSE:BJTOTO) 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 Berjaya Sports Toto Berhad:

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

0.12 = RM219m ÷ (RM2.9b - RM1.0b) (Based on the trailing twelve months to March 2021).

So, Berjaya Sports Toto Berhad has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 7.6% it's much better.

View our latest analysis for Berjaya Sports Toto Berhad

In the above chart we have measured Berjaya Sports Toto 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 Berjaya Sports Toto Berhad here for free.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Berjaya Sports Toto Berhad, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 12% from 30% five years ago. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Berjaya Sports Toto Berhad's ROCE

In summary, we're somewhat concerned by Berjaya Sports Toto Berhad's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last five years have experienced a 11% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Like most companies, Berjaya Sports Toto Berhad does come with some risks, and we've found 2 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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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