There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. Although, when we looked at Perusahaan Sadur Timah Malaysia (Perstima) Berhad (KLSE:PERSTIM), it didn’t seem to tick all of these boxes.

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. The formula for this calculation on Perusahaan Sadur Timah Malaysia (Perstima) Berhad is:

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

0.035 = RM23m ÷ (RM921m – RM256m) (Based on the trailing twelve months to June 2023).

Thus, Perusahaan Sadur Timah Malaysia (Perstima) Berhad has an ROCE of 3.5%. In absolute terms, that’s a low return and it also under-performs the Metals and Mining industry average of 8.1%.

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.

The Trend Of ROCE

On the surface, the trend of ROCE at Perusahaan Sadur Timah Malaysia (Perstima) Berhad doesn’t inspire confidence. To be more specific, ROCE has fallen from 10% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven’t increased.

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While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 28%, which has impacted the ROCE. If current liabilities hadn’t increased as much as they did, the ROCE could actually be even lower. While the ratio isn’t currently too high, it’s worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Perusahaan Sadur Timah Malaysia (Perstima) Berhad have fallen, meanwhile the business is employing more capital than it was five years ago. And long term shareholders have watched their investments stay flat over the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a separate note, we’ve found 2 warning signs for Perusahaan Sadur Timah Malaysia (Perstima) Berhad you’ll probably want to know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.