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What are the early trends we should look for to identify a stock that could multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. That's why when we briefly looked at Scientex Berhad's (KLSE:SCIENTX) ROCE trend, we were pretty happy with what we saw.
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. Analysts use this formula to calculate it for Scientex Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = RM590m ÷ (RM5.5b - RM1.7b) (Based on the trailing twelve months to July 2023).
So, Scientex Berhad has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 6.9% generated by the Chemicals industry.
See our latest analysis for Scientex Berhad
In the above chart we have measured Scientex Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Scientex Berhad here for free.
So How Is Scientex Berhad's ROCE Trending?
While the returns on capital are good, they haven't moved much. The company has consistently earned 15% for the last five years, and the capital employed within the business has risen 72% in that time. Since 15% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.
What We Can Learn From Scientex Berhad's ROCE
In the end, Scientex Berhad has proven its ability to adequately reinvest capital at good rates of return. Therefore it's no surprise that shareholders have earned a respectable 46% return if they held over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.
Scientex Berhad could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.