Returns On Capital At Serba Dinamik Holdings Berhad (KLSE:SERBADK) Paint A Concerning Picture

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. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount 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 investigating Serba Dinamik Holdings Berhad (KLSE:SERBADK), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What is it?

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 Serba Dinamik Holdings Berhad:

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

0.028 = RM153m ÷ (RM7.7b - RM2.3b) (Based on the trailing twelve months to June 2021).

So, Serba Dinamik Holdings Berhad has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 8.0%.

Check out our latest analysis for Serba Dinamik Holdings Berhad

In the above chart we have measured Serba Dinamik Holdings Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Serba Dinamik Holdings Berhad.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Serba Dinamik Holdings Berhad, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 2.8% from 27% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a related note, Serba Dinamik Holdings Berhad has decreased its current liabilities to 30% 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. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

What We Can Learn From Serba Dinamik Holdings Berhad's ROCE

While returns have fallen for Serba Dinamik Holdings Berhad in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. But since the stock has dived 91% in the last five years, there could be other drivers that are influencing the business' outlook. Therefore, we'd suggest researching the stock further to uncover more about the business.

One more thing: We've identified 5 warning signs with Serba Dinamik Holdings Berhad (at least 2 which are a bit concerning) , and understanding them would certainly be useful.

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. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.