Capital Investments At SKP Resources Bhd (KLSE:SKPRES) Point To A Promising Future

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. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Ergo, when we looked at the ROCE trends at SKP Resources Bhd (KLSE:SKPRES), we liked what we saw.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on SKP Resources Bhd is:

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

0.23 = RM214m ÷ (RM1.6b - RM644m) (Based on the trailing twelve months to September 2022).

Thus, SKP Resources Bhd has an ROCE of 23%. That's a fantastic return and not only that, it outpaces the average of 18% earned by companies in a similar industry.

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'd like to see what analysts are forecasting going forward, you should check out our free report for SKP Resources Bhd.

What The Trend Of ROCE Can Tell Us

It's hard not to be impressed by SKP Resources Bhd's returns on capital. Over the past five years, ROCE has remained relatively flat at around 23% and the business has deployed 61% more capital into its operations. Returns like this are the envy of most businesses and given it has repeatedly reinvested at these rates, that's even better. If SKP Resources Bhd can keep this up, we'd be very optimistic about its future.

On a side note, SKP Resources Bhd's current liabilities are still rather high at 41% of total assets. 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.

The Bottom Line

SKP Resources Bhd has demonstrated its proficiency by generating high returns on increasing amounts of capital employed, which we're thrilled about. In light of this, the stock has only gained 12% over the last five years for shareholders who have owned the stock in this period. So to determine if SKP Resources Bhd is a multi-bagger going forward, we'd suggest digging deeper into the company's other fundamentals.

SKP Resources Bhd does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is potentially serious...

SKP Resources Bhd is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.