If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Perusahaan Sadur Timah Malaysia (Perstima) Berhad's (KLSE:PERSTIM) returns on capital, so let's have a look.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Perusahaan Sadur Timah Malaysia (Perstima) Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.15 = RM101m ÷ (RM952m - RM274m) (Based on the trailing twelve months to December 2022).
Thus, Perusahaan Sadur Timah Malaysia (Perstima) Berhad has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Metals and Mining industry average of 7.7% it's much better.
View our latest analysis for Perusahaan Sadur Timah Malaysia (Perstima) 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 want to delve into the historical earnings, revenue and cash flow of Perusahaan Sadur Timah Malaysia (Perstima) Berhad, check out these free graphs here.
What Can We Tell From Perusahaan Sadur Timah Malaysia (Perstima) Berhad's ROCE Trend?
Perusahaan Sadur Timah Malaysia (Perstima) Berhad is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 15%. Basically the business is earning more per dollar of capital invested and in addition to that, 80% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 29% of the business, which is more than it was five years ago. 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.