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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Sime Darby Plantation Berhad (KLSE:SIMEPLT) so let's look a bit deeper.
Return On Capital Employed (ROCE): What Is It?
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Sime Darby Plantation Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = RM2.9b ÷ (RM32b - RM4.8b) (Based on the trailing twelve months to December 2023).
Therefore, Sime Darby Plantation Berhad has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 7.3% generated by the Food industry.
Check out our latest analysis for Sime Darby Plantation Berhad
In the above chart we have measured Sime Darby Plantation Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Sime Darby Plantation Berhad .
How Are Returns Trending?
Sime Darby Plantation Berhad's ROCE growth is quite impressive. The figures show that over the last five years, ROCE has grown 149% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. The company is doing well in that sense, and it's worth investigating what the management team has planned for long term growth prospects.
In Conclusion...
To bring it all together, Sime Darby Plantation Berhad has done well to increase the returns it's generating from its capital employed. Since the total return from the stock has been almost flat over the last five years, there might be an opportunity here if the valuation looks good. So researching this company further and determining whether or not these trends will continue seems justified.
Sime Darby Plantation Berhad does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...