What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Speaking of which, we noticed some great changes in Sunzen Biotech Berhad's (KLSE:SUNZEN) returns on capital, so let's have a look.
Understanding 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. The formula for this calculation on Sunzen Biotech Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.049 = RM6.7m ÷ (RM157m - RM20m) (Based on the trailing twelve months to June 2022).
So, Sunzen Biotech Berhad has an ROCE of 4.9%. In absolute terms, that's a low return and it also under-performs the Personal Products industry average of 11%.
Check out our latest analysis for Sunzen Biotech Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Sunzen Biotech Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Sunzen Biotech Berhad, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
We're glad to see that ROCE is heading in the right direction, even if it is still low at the moment. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 4.9%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 34%. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
What We Can Learn From Sunzen Biotech Berhad's ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Sunzen Biotech Berhad has. Astute investors may have an opportunity here because the stock has declined 35% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.
One final note, you should learn about the 3 warning signs we've spotted with Sunzen Biotech Berhad (including 1 which makes us a bit uncomfortable) .