Returns On Capital Are Showing Encouraging Signs At Rimbunan Sawit Berhad (KLSE:RSAWIT)

There are a few key trends to look for if we want to identify the next multi-bagger. 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. With that in mind, we've noticed some promising trends at Rimbunan Sawit Berhad (KLSE:RSAWIT) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Rimbunan Sawit Berhad, this is the formula:

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

0.045 = RM27m ÷ (RM891m - RM293m) (Based on the trailing twelve months to June 2022).

So, Rimbunan Sawit Berhad has an ROCE of 4.5%. Ultimately, that's a low return and it under-performs the Food industry average of 12%.

Our analysis indicates that RSAWIT is potentially undervalued!

Historical performance is a great place to start when researching a stock so above you can see the gauge for Rimbunan Sawit Berhad's ROCE against it's prior returns. If you'd like to look at how Rimbunan Sawit Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Rimbunan Sawit Berhad Tell Us?

We're delighted to see that Rimbunan Sawit Berhad is reaping rewards from its investments and has now broken into profitability. While the business is profitable now, it used to be incurring losses on invested capital five years ago. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 52%. Rimbunan Sawit Berhad could be selling under-performing assets since the ROCE is improving.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Essentially the business now has suppliers or short-term creditors funding about 33% of its operations, which isn't ideal. Keep an eye out for future increases because when the ratio of current liabilities to total assets gets particularly high, this can introduce some new risks for the business.

The Bottom Line

In the end, Rimbunan Sawit Berhad has proven it's capital allocation skills are good with those higher returns from less amount of capital. Astute investors may have an opportunity here because the stock has declined 58% in the last five years. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing: We've identified 3 warning signs with Rimbunan Sawit Berhad (at least 1 which can't be ignored) , and understanding them would certainly be useful.

While Rimbunan Sawit 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.