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

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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 Berjaya Sports Toto Berhad (KLSE:BJTOTO) 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?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.14 = RM255m ÷ (RM2.9b - RM1b) (Based on the trailing twelve months to September 2020).

So, Berjaya Sports Toto Berhad has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 3.3% it's much better.

Check out 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.

The Trend Of ROCE

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 34%, but since then they've fallen to 14%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

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. It should come as no surprise then that the stock has fallen 15% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to continue researching Berjaya Sports Toto Berhad, you might be interested to know about the 2 warning signs that our analysis has discovered.

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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