What Do The Returns On Capital At Berjaya Sports Toto Berhad (KLSE:BJTOTO) Tell Us?

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Berjaya Sports Toto Berhad (KLSE:BJTOTO), we don't think it's current trends fit the mold of a multi-bagger.

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)

0.13 = RM240m ÷ (RM2.9b - RM1.1b) (Based on the trailing twelve months to June 2020).

Therefore, Berjaya Sports Toto Berhad has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 5.4% it's much better.

View our latest analysis for Berjaya Sports Toto Berhad

Above you can see how the current ROCE for Berjaya Sports Toto 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 Berjaya Sports Toto Berhad here for free.

So How Is Berjaya Sports Toto Berhad's ROCE Trending?

In terms of Berjaya Sports Toto Berhad's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 37%, but since then they've fallen to 13%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

Our Take On 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 14% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a separate note, we've found 1 warning sign for Berjaya Sports Toto Berhad you'll probably want to know about.

While Berjaya Sports Toto Berhad isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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