Southern Steel Berhad (KLSE:SSTEEL) Is Experiencing Growth In Returns On Capital

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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. So on that note, Southern Steel Berhad (KLSE:SSTEEL) looks quite promising in regards to its trends of return on capital.

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. To calculate this metric for Southern Steel Berhad, this is the formula:

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

0.018 = RM20m ÷ (RM2.2b - RM1.1b) (Based on the trailing twelve months to March 2021).

Therefore, Southern Steel Berhad has an ROCE of 1.8%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 6.1%.

See our latest analysis for Southern Steel 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 Steel Berhad, check out these free graphs here.

So How Is Southern Steel Berhad's ROCE Trending?

Shareholders will be relieved that Southern Steel Berhad has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 1.8% on its capital. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

Another thing to note, Southern Steel Berhad has a high ratio of current liabilities to total assets of 49%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Southern Steel Berhad's ROCE

To sum it up, Southern Steel Berhad is collecting higher returns from the same amount of capital, and that's impressive. Since the stock has only returned 3.2% to shareholders over the last five years, the promising fundamentals may not be recognized yet by investors. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

If you want to know some of the risks facing Southern Steel Berhad we've found 2 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

While Southern Steel 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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