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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Seni Jaya Corporation Berhad (KLSE:SJC) and its trend of ROCE, we really liked what we saw.
Understanding 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. To calculate this metric for Seni Jaya Corporation Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.16 = RM8.5m ÷ (RM71m - RM16m) (Based on the trailing twelve months to December 2022).
Therefore, Seni Jaya Corporation Berhad has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Media industry average of 10% it's much better.
Check out our latest analysis for Seni Jaya Corporation 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're interested in investigating Seni Jaya Corporation Berhad's past further, check out this free graph of past earnings, revenue and cash flow.
The Trend Of ROCE
Shareholders will be relieved that Seni Jaya Corporation Berhad has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 16%, which is always encouraging. While returns have increased, the amount of capital employed by Seni Jaya Corporation Berhad has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. Because in the end, a business can only get so efficient.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 23% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.