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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after investigating Sime Darby Berhad (KLSE:SIME), we don't think it's current trends fit the mold of a multi-bagger.
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. Analysts use this formula to calculate it for Sime Darby Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.07 = RM2.2b ÷ (RM52b - RM20b) (Based on the trailing twelve months to June 2024).
So, Sime Darby Berhad has an ROCE of 7.0%. Even though it's in line with the industry average of 6.7%, it's still a low return by itself.
View our latest analysis for Sime Darby Berhad
In the above chart we have measured Sime Darby Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free analyst report for Sime Darby Berhad .
What The Trend Of ROCE Can Tell Us
There are better returns on capital out there than what we're seeing at Sime Darby Berhad. The company has employed 101% more capital in the last five years, and the returns on that capital have remained stable at 7.0%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
Our Take On Sime Darby Berhad's ROCE
As we've seen above, Sime Darby Berhad's returns on capital haven't increased but it is reinvesting in the business. Unsurprisingly, the stock has only gained 36% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
If you'd like to know about the risks facing Sime Darby Berhad, we've discovered 1 warning sign that you should be aware of.
While Sime Darby Berhad isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.