Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we’ll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at 7-Eleven Malaysia Holdings Berhad (KLSE:SEM) and its ROCE trend, we weren’t exactly thrilled.

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 7-Eleven Malaysia Holdings Berhad:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)

0.15 = RM208m ÷ (RM2.8b – RM1.5b) (Based on the trailing twelve months to September 2023).

Thus, 7-Eleven Malaysia Holdings Berhad has an ROCE of 15%. In absolute terms, that’s a satisfactory return, but compared to the Consumer Retailing industry average of 10% it’s much better.

Check out our latest analysis for 7-Eleven Malaysia Holdings Berhad

In the above chart we have measured 7-Eleven Malaysia Holdings 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 7-Eleven Malaysia Holdings Berhad here for free.

What Does the ROCE Trend For 7-Eleven Malaysia Holdings Berhad Tell Us?

In terms of 7-Eleven Malaysia Holdings Berhad’s historical ROCE movements, the trend isn’t fantastic. Over the last five years, returns on capital have decreased to 15% from 58% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Story continues

On a related note, 7-Eleven Malaysia Holdings Berhad has decreased its current liabilities to 51% of total assets. So we could link some of this to the decrease in ROCE. What’s more, this can reduce some aspects of risk to the business because now the company’s suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business’ efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they’re still at a pretty high level, so we’d like to see them fall further if possible.

The Key Takeaway

While returns have fallen for 7-Eleven Malaysia Holdings Berhad in recent times, we’re encouraged to see that sales are growing and that the business is reinvesting in its operations. Furthermore the stock has climbed 70% over the last five years, it would appear that investors are upbeat about the future. So should these growth trends continue, we’d be optimistic on the stock going forward.

If you’d like to know more about 7-Eleven Malaysia Holdings Berhad, we’ve spotted 3 warning signs, and 1 of them is concerning.

While 7-Eleven Malaysia Holdings Berhad may not currently earn the highest returns, we’ve compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.