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There are a few key trends to look for if we want to identify the next multi-bagger. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, the ROCE of Scientex Berhad (KLSE:SCIENTX) looks decent, right now, so lets see what the trend of returns can tell us.
Understanding Return On Capital Employed (ROCE)
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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 = RM591m ÷ (RM5.4b - RM1.5b) (Based on the trailing twelve months to January 2023).
So, Scientex Berhad has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 7.6% it's much better.
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.
What Can We Tell From Scientex Berhad's ROCE Trend?
While the returns on capital are good, they haven't moved much. Over the past five years, ROCE has remained relatively flat at around 15% and the business has deployed 95% more capital into its operations. 15% is a pretty standard return, and it provides some comfort knowing that Scientex Berhad has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.
The Bottom Line On Scientex Berhad's ROCE
To sum it up, Scientex Berhad has simply been reinvesting capital steadily, at those decent rates of return. Therefore it's no surprise that shareholders have earned a respectable 42% 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.
One more thing to note, we've identified 1 warning sign with Scientex Berhad and understanding it should be part of your investment process.
While Scientex 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.