Capital Allocation Trends At Senheng New Retail Berhad (KLSE:SENHENG) Aren't Ideal

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. In light of that, when we looked at Senheng New Retail Berhad (KLSE:SENHENG) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Senheng New Retail Berhad, this is the formula:

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

0.10 = RM68m ÷ (RM858m - RM208m) (Based on the trailing twelve months to June 2023).

Therefore, Senheng New Retail Berhad has an ROCE of 10%. In isolation, that's a pretty standard return but against the Specialty Retail industry average of 15%, it's not as good.

Check out our latest analysis for Senheng New Retail Berhad

Above you can see how the current ROCE for Senheng New Retail Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Senheng New Retail Berhad here for free.

So How Is Senheng New Retail Berhad's ROCE Trending?

In terms of Senheng New Retail Berhad's historical ROCE movements, the trend isn't fantastic. Over the last four years, returns on capital have decreased to 10% from 21% four years ago. However it looks like Senheng New Retail Berhad might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. 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, Senheng New Retail Berhad has done well to pay down its current liabilities to 24% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

The Key Takeaway

In summary, Senheng New Retail Berhad 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 45% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Senheng New Retail Berhad has the makings of a multi-bagger.

Senheng New Retail Berhad does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is significant...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.