Smart Asia Chemical Bhd (KLSE:SMART) Could Be Struggling To Allocate Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating Smart Asia Chemical Bhd (KLSE:SMART), we don't think it's current trends fit the mold of a multi-bagger.

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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. Analysts use this formula to calculate it for Smart Asia Chemical Bhd:

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

0.032 = RM4.3m ÷ (RM162m - RM26m) (Based on the trailing twelve months to June 2025).

Thus, Smart Asia Chemical Bhd has an ROCE of 3.2%. In absolute terms, that's a low return and it also under-performs the Chemicals industry average of 9.1%.

See our latest analysis for Smart Asia Chemical Bhd

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

What Can We Tell From Smart Asia Chemical Bhd's ROCE Trend?

When we looked at the ROCE trend at Smart Asia Chemical Bhd, we didn't gain much confidence. Over the last four years, returns on capital have decreased to 3.2% from 23% four years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Smart Asia Chemical Bhd has done well to pay down its current liabilities to 16% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line

In summary, Smart Asia Chemical Bhd is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. And in the last year, the stock has given away 44% so the market doesn't look too hopeful on these trends strengthening any time soon. In any case, the stock doesn't have these traits of a multi-bagger discussed above, so if that's what you're looking for, we think you'd have more luck elsewhere.

If you'd like to know more about Smart Asia Chemical Bhd, we've spotted 3 warning signs, and 1 of them makes us a bit uncomfortable.

While Smart Asia Chemical Bhd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.