Sunzen Biotech Berhad (KLSE:SUNZEN) Shareholders Will Want The ROCE Trajectory To Continue

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. With that in mind, we've noticed some promising trends at Sunzen Biotech Berhad (KLSE:SUNZEN) so let's look a bit deeper.

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. To calculate this metric for Sunzen Biotech Berhad, this is the formula:

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

0.063 = RM9.0m ÷ (RM151m - RM8.1m) (Based on the trailing twelve months to September 2023).

Thus, Sunzen Biotech Berhad has an ROCE of 6.3%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 10%.

Check out our latest analysis for Sunzen Biotech 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 want to delve into the historical earnings, revenue and cash flow of Sunzen Biotech Berhad, check out these free graphs here.

The Trend Of ROCE

Shareholders will be relieved that Sunzen Biotech Berhad has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 6.3% on its capital. While returns have increased, the amount of capital employed by Sunzen Biotech Berhad has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 5.3%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that Sunzen Biotech Berhad has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line On Sunzen Biotech Berhad's ROCE

As discussed above, Sunzen Biotech Berhad appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And with a respectable 53% awarded to those who held the stock over the last five years, you could argue that these developments are starting to get the attention they deserve. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

If you want to continue researching Sunzen Biotech Berhad, you might be interested to know about the 1 warning sign that our analysis has discovered.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.