Investors Will Want Sin Heng Chan (Malaya) Berhad's (KLSE:SHCHAN) Growth In ROCE To Persist

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. So on that note, Sin Heng Chan (Malaya) Berhad (KLSE:SHCHAN) looks quite promising in regards to its trends of return on capital.

Understanding Return On Capital Employed (ROCE)

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. The formula for this calculation on Sin Heng Chan (Malaya) Berhad is:

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

0.00024 = RM102k ÷ (RM450m - RM26m) (Based on the trailing twelve months to June 2023).

Thus, Sin Heng Chan (Malaya) Berhad has an ROCE of 0.02%. Ultimately, that's a low return and it under-performs the Food industry average of 6.4%.

See our latest analysis for Sin Heng Chan (Malaya) Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sin Heng Chan (Malaya) Berhad's ROCE against it's prior returns. If you're interested in investigating Sin Heng Chan (Malaya) Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Sin Heng Chan (Malaya) Berhad's ROCE Trending?

We're delighted to see that Sin Heng Chan (Malaya) Berhad is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses five years ago, but now it's earning 0.02% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Sin Heng Chan (Malaya) Berhad is utilizing 170% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 5.8%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

The Bottom Line

To the delight of most shareholders, Sin Heng Chan (Malaya) Berhad has now broken into profitability. Given the stock has declined 29% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you want to know some of the risks facing Sin Heng Chan (Malaya) Berhad we've found 3 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

While Sin Heng Chan (Malaya) Berhad isn't earning the highest return, check out this free list of companies that are 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.