Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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 Southern Acids (M) Berhad (KLSE:SAB) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
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 Southern Acids (M) Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.084 = RM76m ÷ (RM973m - RM76m) (Based on the trailing twelve months to March 2023).
Therefore, Southern Acids (M) Berhad has an ROCE of 8.4%. On its own, that's a low figure but it's around the 7.4% average generated by the Chemicals industry.
See our latest analysis for Southern Acids (M) Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Southern Acids (M) Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Southern Acids (M) Berhad, check out these free graphs here.
How Are Returns Trending?
The returns on capital haven't changed much for Southern Acids (M) Berhad in recent years. Over the past five years, ROCE has remained relatively flat at around 8.4% and the business has deployed 38% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
The Bottom Line On Southern Acids (M) Berhad's ROCE
As we've seen above, Southern Acids (M) Berhad's returns on capital haven't increased but it is reinvesting in the business. Unsurprisingly then, the total return to shareholders over the last five years has been flat. On the whole, we aren't too inspired by the underlying trends and we think there may be better chances of finding a multi-bagger elsewhere.
On a separate note, we've found 1 warning sign for Southern Acids (M) Berhad you'll probably want to know about.
While Southern Acids (M) Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.