Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after investigating SCC Holdings Berhad (KLSE:SCC), we don't think it's current trends fit the mold of a multi-bagger.
What Is Return On Capital Employed (ROCE)?
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. Analysts use this formula to calculate it for SCC Holdings Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.097 = RM4.6m ÷ (RM54m - RM6.1m) (Based on the trailing twelve months to September 2022).
Thus, SCC Holdings Berhad has an ROCE of 9.7%. In absolute terms, that's a low return, but it's much better than the Trade Distributors industry average of 7.9%.
Check out our latest analysis for SCC Holdings Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for SCC Holdings Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of SCC Holdings Berhad, check out these free graphs here.
How Are Returns Trending?
In terms of SCC Holdings Berhad's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 17% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.
Our Take On SCC Holdings Berhad's ROCE
Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for SCC Holdings Berhad. These growth trends haven't led to growth returns though, since the stock has fallen 23% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.
SCC Holdings Berhad does come with some risks though, we found 5 warning signs in our investment analysis, and 3 of those make us uncomfortable...