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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Kelington Group Berhad's (KLSE:KGB) returns on capital, so let's have a look.
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. The formula for this calculation on Kelington Group Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.30 = RM97m ÷ (RM967m - RM646m) (Based on the trailing twelve months to June 2023).
So, Kelington Group Berhad has an ROCE of 30%. That's a fantastic return and not only that, it outpaces the average of 5.8% earned by companies in a similar industry.
See our latest analysis for Kelington Group Berhad
In the above chart we have measured Kelington Group Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
How Are Returns Trending?
The trends we've noticed at Kelington Group Berhad are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 30%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 211%. So we're very much inspired by what we're seeing at Kelington Group Berhad thanks to its ability to profitably reinvest capital.
On a side note, Kelington Group Berhad's current liabilities are still rather high at 67% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line On Kelington Group Berhad's ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Kelington Group Berhad has. And a remarkable 185% total return over the last five years tells us that investors are expecting more good things to come in the future. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.