Our Take On The Returns On Capital At Asia Poly Holdings Berhad (KLSE:ASIAPLY)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Having said that, from a first glance at Asia Poly Holdings Berhad (KLSE:ASIAPLY) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Asia Poly Holdings Berhad is:

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

0.054 = RM8.2m ÷ (RM204m - RM52m) (Based on the trailing twelve months to December 2020).

Therefore, Asia Poly Holdings Berhad has an ROCE of 5.4%. Ultimately, that's a low return and it under-performs the Chemicals industry average of 7.0%.

See our latest analysis for Asia Poly Holdings Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Asia Poly Holdings Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Asia Poly Holdings Berhad, check out these free graphs here.

How Are Returns Trending?

On the surface, the trend of ROCE at Asia Poly Holdings Berhad doesn't inspire confidence. Over the last five years, returns on capital have decreased to 5.4% from 16% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Asia Poly Holdings Berhad has decreased its current liabilities to 26% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

In Conclusion...

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Asia Poly Holdings Berhad. And the stock has followed suit returning a meaningful 97% to shareholders over the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

One final note, you should learn about the 3 warning signs we've spotted with Asia Poly Holdings Berhad (including 2 which are significant) .

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. 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.
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