There's Been No Shortage Of Growth Recently For South Malaysia Industries Berhad's (KLSE:SMI) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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.

What is Return On Capital Employed (ROCE)?

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 South Malaysia Industries Berhad:

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

0.11 = RM17m ÷ (RM182m - RM22m) (Based on the trailing twelve months to September 2021).

Therefore, South Malaysia Industries Berhad has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Metals and Mining industry average of 12%.

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'd like to look at how South Malaysia Industries Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From South Malaysia Industries Berhad's ROCE Trend?

South Malaysia Industries Berhad is showing promise given that its ROCE is trending up and to the right. The figures show that over the last five years, ROCE has grown 352% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. 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.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 12%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. This tells us that South Malaysia Industries Berhad has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

What We Can Learn From South Malaysia Industries Berhad's ROCE

As discussed above, South Malaysia Industries Berhad appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Since the stock has returned a solid 41% to shareholders over the last five years, it's fair to say investors are beginning to recognize these changes. 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.

If you want to know some of the risks facing South Malaysia Industries Berhad we've found 2 warning signs (1 is significant!) that you should be aware of before investing here.

While South Malaysia Industries 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.

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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.