Returns Are Gaining Momentum At Sime Darby Plantation Berhad (KLSE:SIMEPLT)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Speaking of which, we noticed some great changes in Sime Darby Plantation Berhad's (KLSE:SIMEPLT) returns on capital, so let's have a look.

What Is 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. To calculate this metric for Sime Darby Plantation Berhad, this is the formula:

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

0.10 = RM2.9b ÷ (RM32b - RM4.7b) (Based on the trailing twelve months to September 2023).

Thus, Sime Darby Plantation Berhad has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 5.7% it's much better.

View our latest analysis for Sime Darby Plantation Berhad

Above you can see how the current ROCE for Sime Darby Plantation Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

Sime Darby Plantation Berhad is showing promise given that its ROCE is trending up and to the right. More specifically, while the company has kept capital employed relatively flat over the last five years, the ROCE has climbed 154% in that same time. So our take on this is that the business has increased efficiencies to generate these higher returns, all the while not needing to make any additional investments. On that front, things are looking good so it's worth exploring what management has said about growth plans going forward.

What We Can Learn From Sime Darby Plantation Berhad's ROCE

In summary, we're delighted to see that Sime Darby Plantation Berhad has been able to increase efficiencies and earn higher rates of return on the same amount of capital. Since the stock has only returned 5.8% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. So with that in mind, we think the stock deserves further research.

Like most companies, Sime Darby Plantation Berhad does come with some risks, and we've found 1 warning sign that you should be aware of.

While Sime Darby Plantation 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.

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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.