Cahya Mata Sarawak Berhad (KLSE:CMSB) Might Be Having Difficulty Using Its Capital Effectively

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. Although, when we looked at Cahya Mata Sarawak Berhad (KLSE:CMSB), it didn't seem to tick all of these boxes.

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

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. To calculate this metric for Cahya Mata Sarawak Berhad, this is the formula:

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

0.0044 = RM16m ÷ (RM4.6b - RM1.0b) (Based on the trailing twelve months to June 2021).

Thus, Cahya Mata Sarawak Berhad has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 7.2%.

View our latest analysis for Cahya Mata Sarawak Berhad

In the above chart we have measured Cahya Mata Sarawak Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Cahya Mata Sarawak Berhad Tell Us?

When we looked at the ROCE trend at Cahya Mata Sarawak Berhad, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 0.4% from 11% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Key Takeaway

While returns have fallen for Cahya Mata Sarawak Berhad in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 61% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

Cahya Mata Sarawak Berhad could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While Cahya Mata Sarawak 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.

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.

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