SDS Group Berhad's (KLSE:SDS) Returns On Capital Are Heading Higher

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. Speaking of which, we noticed some great changes in SDS Group Berhad's (KLSE:SDS) returns on capital, so let's have a look.

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. The formula for this calculation on SDS Group Berhad is:

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

0.14 = RM15m ÷ (RM143m - RM37m) (Based on the trailing twelve months to March 2022).

Therefore, SDS Group Berhad has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 11% it's much better.

Check out our latest analysis for SDS Group Berhad

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how SDS Group 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 SDS Group Berhad Tell Us?

SDS Group Berhad is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 14%. Basically the business is earning more per dollar of capital invested and in addition to that, 55% more capital is being employed now too. 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. This tells us that SDS Group Berhad has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Key Takeaway

To sum it up, SDS Group Berhad has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Since the stock has only returned 3.5% to shareholders over the last year, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

On a final note, we've found 3 warning signs for SDS Group Berhad that we think you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.