The Returns At Southern Acids (M) Berhad (KLSE:SAB) Aren't Growing

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Southern Acids (M) Berhad (KLSE:SAB) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

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 Southern Acids (M) Berhad, this is the formula:

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

0.076 = RM55m ÷ (RM786m - RM63m) (Based on the trailing twelve months to December 2020).

Thus, Southern Acids (M) Berhad has an ROCE of 7.6%. On its own, that's a low figure but it's around the 7.2% average generated by the Chemicals industry.

View 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're interested in investigating Southern Acids (M) Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

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

There are better returns on capital out there than what we're seeing at Southern Acids (M) Berhad. Over the past five years, ROCE has remained relatively flat at around 7.6% and the business has deployed 26% more capital into its operations. 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.

The Bottom Line 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 with the stock having returned a mere 6.9% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

Southern Acids (M) 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.

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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