Returns On Capital Are Showing Encouraging Signs At South Malaysia Industries Berhad (KLSE:SMI)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in South Malaysia Industries Berhad's (KLSE:SMI) returns on capital, so let's have a look.

Understanding 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 South Malaysia Industries Berhad, this is the formula:

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

0.024 = RM3.8m ÷ (RM190m - RM27m) (Based on the trailing twelve months to March 2021).

Thus, South Malaysia Industries Berhad has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 6.7%.

Check out our latest analysis for South Malaysia Industries Berhad

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

What Does the ROCE Trend For South Malaysia Industries Berhad Tell Us?

While the ROCE isn't as high as some other companies out there, it's great to see it's on the up. The figures show that over the last five years, ROCE has grown 10,117% whilst employing roughly the same amount of capital. So it's likely that the business is now reaping the full benefits of its past investments, since the capital employed hasn't changed considerably. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.

One more thing to note, South Malaysia Industries Berhad has decreased current liabilities to 14% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance.

Our Take On South Malaysia Industries Berhad's ROCE

To bring it all together, South Malaysia Industries Berhad has done well to increase the returns it's generating from its capital employed. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 42% return over the last five years. In light of that, we think it's worth looking further into this stock because if South Malaysia Industries Berhad can keep these trends up, it could have a bright future ahead.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for South Malaysia Industries Berhad (of which 1 doesn't sit too well with us!) that you should know about.

While South Malaysia Industries 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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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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