What trends should we look for it we want to identify stocks that can multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Senheng New Retail Berhad (KLSE:SENHENG) and its ROCE trend, we weren't exactly thrilled.
We've discovered 4 warning signs about Senheng New Retail Berhad. View them for free.
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 Senheng New Retail Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.03 = RM20m ÷ (RM855m - RM208m) (Based on the trailing twelve months to December 2024).
So, Senheng New Retail Berhad has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 9.3%.
View our latest analysis for Senheng New Retail Berhad
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Senheng New Retail Berhad.
What Does the ROCE Trend For Senheng New Retail Berhad Tell Us?
When we looked at the ROCE trend at Senheng New Retail Berhad, we didn't gain much confidence. Around five years ago the returns on capital were 18%, but since then they've fallen to 3.0%. However it looks like Senheng New Retail Berhad might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.
On a related note, Senheng New Retail Berhad has decreased its current liabilities to 24% 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.