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What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So, when we ran our eye over Scientex Berhad's (KLSE:SCIENTX) trend of ROCE, 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 Scientex Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = RM559m ÷ (RM5.5b - RM1.8b) (Based on the trailing twelve months to July 2022).
Thus, Scientex Berhad has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 8.0% generated by the Chemicals industry.
Check out our latest analysis for Scientex Berhad
Above you can see how the current ROCE for Scientex 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 Scientex Berhad.
What Does the ROCE Trend For Scientex Berhad Tell Us?
While the current returns on capital are decent, they haven't changed much. The company has employed 101% more capital in the last five years, and the returns on that capital have remained stable at 15%. Since 15% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
What We Can Learn From Scientex Berhad's ROCE
To sum it up, Scientex Berhad has simply been reinvesting capital steadily, at those decent rates of return. And given the stock has only risen 30% over the last five years, we'd suspect the market is beginning to recognize these trends. So because of the trends we're seeing, we'd recommend looking further into this stock to see if it has the makings of a multi-bagger.
Like most companies, Scientex Berhad does come with some risks, and we've found 1 warning sign that you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.