Sern Kou Resources Berhad (KLSE:SERNKOU) Will Be Hoping To Turn Its Returns On Capital Around
Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Sern Kou Resources Berhad (KLSE:SERNKOU) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
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. To calculate this metric for Sern Kou Resources Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.012 = RM3.2m ÷ (RM346m - RM80m) (Based on the trailing twelve months to June 2023).
So, Sern Kou Resources Berhad has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 11%.
View our latest analysis for Sern Kou Resources Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Sern Kou Resources Berhad's ROCE against it's prior returns. If you're interested in investigating Sern Kou Resources Berhad's past further, check out this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Sern Kou Resources Berhad, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 1.2% from 14% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a side note, Sern Kou Resources Berhad has done well to pay down its current liabilities to 23% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
The Key Takeaway
In summary, despite lower returns in the short term, we're encouraged to see that Sern Kou Resources Berhad is reinvesting for growth and has higher sales as a result. And the stock has done incredibly well with a 205% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.
One more thing: We've identified 4 warning signs with Sern Kou Resources Berhad (at least 1 which is a bit unpleasant) , and understanding them would certainly be useful.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.
