A Look Into SKP Resources Bhd's (KLSE:SKPRES) Impressive Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. Ergo, when we looked at the ROCE trends at SKP Resources Bhd (KLSE:SKPRES), we liked what we saw.

Understanding 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 SKP Resources Bhd:

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

0.23 = RM164m ÷ (RM1.1b - RM357m) (Based on the trailing twelve months to March 2021).

So, SKP Resources Bhd has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Electronic industry average of 13%.

Check out our latest analysis for SKP Resources Bhd

In the above chart we have measured SKP Resources Bhd's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is SKP Resources Bhd's ROCE Trending?

In terms of SKP Resources Bhd's history of ROCE, it's quite impressive. The company has consistently earned 23% for the last five years, and the capital employed within the business has risen 95% in that time. With returns that high, it's great that the business can continually reinvest its money at such appealing rates of return. If these trends can continue, it wouldn't surprise us if the company became a multi-bagger.

The Bottom Line

In the end, the company has proven it can reinvest it's capital at high rates of returns, which you'll remember is a trait of a multi-bagger. Therefore it's no surprise that shareholders have earned a respectable 95% return if they held over the last five years. So while the positive underlying trends may be accounted for by investors, we still think this stock is worth looking into further.

SKP Resources Bhd does have some risks though, and we've spotted 1 warning sign for SKP Resources Bhd that you might be interested in.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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