Returns On Capital At Southern Acids (M) Berhad (KLSE:SAB) Paint An Interesting Picture

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. 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. In light of that, when we looked at Southern Acids (M) Berhad (KLSE:SAB) and its ROCE trend, we weren't exactly thrilled.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Southern Acids (M) Berhad is:

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

0.077 = RM55m ÷ (RM770m - RM55m) (Based on the trailing twelve months to September 2020).

Thus, Southern Acids (M) Berhad has an ROCE of 7.7%. On its own, that's a low figure but it's around the 6.5% average generated by the Chemicals industry.

Check out our latest analysis for Southern Acids (M) 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 Southern Acids (M) Berhad, check out these free graphs here.

What Can We Tell From Southern Acids (M) Berhad's ROCE Trend?

The returns on capital haven't changed much for Southern Acids (M) Berhad in recent years. The company has employed 27% more capital in the last five years, and the returns on that capital have remained stable at 7.7%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Our Take On Southern Acids (M) Berhad's ROCE

As we've seen above, Southern Acids (M) Berhad's returns on capital haven't increased but it is reinvesting in the business. And investors may be recognizing these trends since the stock has only returned a total of 9.4% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

While Southern Acids (M) Berhad doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

While Southern Acids (M) 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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