If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Aeon (M) Bhd (KLSE:AEON) and its ROCE trend, we weren't exactly thrilled.
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What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Aeon (M) Bhd:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.075 = RM308m ÷ (RM5.6b - RM1.5b) (Based on the trailing twelve months to December 2024).
So, Aeon (M) Bhd has an ROCE of 7.5%. Ultimately, that's a low return and it under-performs the Consumer Retailing industry average of 13%.
Check out our latest analysis for Aeon (M) Bhd
In the above chart we have measured Aeon (M) 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 analyst report for Aeon (M) Bhd .
What Does the ROCE Trend For Aeon (M) Bhd Tell Us?
Over the past five years, Aeon (M) Bhd's ROCE and capital employed have both remained mostly flat. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect Aeon (M) Bhd to be a multi-bagger going forward. This probably explains why Aeon (M) Bhd is paying out 45% of its income to shareholders in the form of dividends. Given the business isn't reinvesting in itself, it makes sense to distribute a portion of earnings among shareholders.
On a side note, Aeon (M) Bhd has done well to reduce current liabilities to 27% of total assets over the last five years. Effectively suppliers now fund less of the business, which can lower some elements of risk.
The Bottom Line On Aeon (M) Bhd's ROCE
We can conclude that in regards to Aeon (M) Bhd's returns on capital employed and the trends, there isn't much change to report on. Although the market must be expecting these trends to improve because the stock has gained 51% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.