Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at 7-Eleven Malaysia Holdings Berhad (KLSE:SEM), it didn't seem to tick all of these boxes.
What Is Return On Capital Employed (ROCE)?
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. Analysts use this formula to calculate it for 7-Eleven Malaysia Holdings Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = RM197m ÷ (RM2.7b - RM1.1b) (Based on the trailing twelve months to March 2023).
So, 7-Eleven Malaysia Holdings Berhad has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 13% generated by the Consumer Retailing industry.
View our latest analysis for 7-Eleven Malaysia Holdings Berhad
Above you can see how the current ROCE for 7-Eleven Malaysia Holdings Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for 7-Eleven Malaysia Holdings Berhad.
What Does the ROCE Trend For 7-Eleven Malaysia Holdings Berhad Tell Us?
When we looked at the ROCE trend at 7-Eleven Malaysia Holdings Berhad, we didn't gain much confidence. To be more specific, ROCE has fallen from 56% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.
On a related note, 7-Eleven Malaysia Holdings Berhad has decreased its current liabilities to 41% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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. Keep in mind 41% is still pretty high, so those risks are still somewhat prevalent.