Be Wary Of Sports Toto Berhad (KLSE:SPTOTO) And Its Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing 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. However, after investigating Sports Toto Berhad (KLSE:SPTOTO), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Sports Toto Berhad is:

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

0.14 = RM309m ÷ (RM3.8b - RM1.5b) (Based on the trailing twelve months to December 2023).

So, Sports Toto Berhad has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Hospitality industry average of 6.0% it's much better.

See our latest analysis for Sports Toto Berhad

In the above chart we have measured Sports Toto 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 Sports Toto Berhad for free.

How Are Returns Trending?

On the surface, the trend of ROCE at Sports Toto Berhad doesn't inspire confidence. Around five years ago the returns on capital were 42%, but since then they've fallen to 14%. However it looks like Sports Toto Berhad might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

On a related note, Sports Toto Berhad has decreased its current liabilities to 40% 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.

Our Take On Sports Toto Berhad's ROCE

To conclude, we've found that Sports Toto Berhad is reinvesting in the business, but returns have been falling. And in the last five years, the stock has given away 33% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Sports Toto Berhad has the makings of a multi-bagger.

On a final note, we found 3 warning signs for Sports Toto Berhad (1 doesn't sit too well with us) you should be aware of.

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.