If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Sern Kou Resources Berhad (KLSE:SERNKOU) and its ROCE trend, we weren't exactly thrilled.
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. To calculate this metric for Sern Kou Resources Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0022 = RM606k ÷ (RM374m - RM104m) (Based on the trailing twelve months to December 2023).
So, Sern Kou Resources Berhad has an ROCE of 0.2%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 10%.
See our latest analysis for Sern Kou Resources Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Sern Kou Resources Berhad's ROCE against it's prior returns. If you'd like to look at how Sern Kou Resources Berhad has performed in the past in other metrics, you can view this free graph of Sern Kou Resources Berhad's past earnings, revenue and cash flow.
The Trend Of ROCE
In terms of Sern Kou Resources Berhad's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 14% 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
The Bottom Line
While returns have fallen for Sern Kou Resources Berhad in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. And the stock has done incredibly well with a 391% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.
On a final note, we found 2 warning signs for Sern Kou Resources Berhad (1 is significant) you should be aware of.