SDS Group Berhad (KLSE:SDS) Could Become A Multi-Bagger

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at the ROCE trend of SDS Group Berhad (KLSE:SDS) we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on SDS Group Berhad is:

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

0.27 = RM33m ÷ (RM162m - RM41m) (Based on the trailing twelve months to March 2023).

Therefore, SDS Group Berhad has an ROCE of 27%. In absolute terms that's a great return and it's even better than the Food industry average of 8.5%.

See our latest analysis for SDS Group Berhad

Above you can see how the current ROCE for SDS Group Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for SDS Group Berhad.

SWOT Analysis for SDS Group Berhad

What Does the ROCE Trend For SDS Group Berhad Tell Us?

SDS Group Berhad is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 27%. The amount of capital employed has increased too, by 57%. So we're very much inspired by what we're seeing at SDS Group Berhad thanks to its ability to profitably reinvest capital.

One more thing to note, SDS Group Berhad has decreased current liabilities to 26% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

What We Can Learn From SDS Group Berhad's ROCE

In summary, it's great to see that SDS Group Berhad can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. And a remarkable 156% total return over the last three years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if SDS Group Berhad can keep these trends up, it could have a bright future ahead.

On a separate note, we've found 2 warning signs for SDS Group Berhad you'll probably want to know about.

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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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.