Did you know there are some financial metrics that can provide clues of a potential 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. 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 Kawan Food Berhad (KLSE:KAWAN), we don't think it's current trends fit the mold of a multi-bagger.
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. To calculate this metric for Kawan Food Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.091 = RM37m ÷ (RM458m - RM55m) (Based on the trailing twelve months to September 2022).
Thus, Kawan Food Berhad has an ROCE of 9.1%. Ultimately, that's a low return and it under-performs the Food industry average of 11%.
View our latest analysis for Kawan Food Berhad
Above you can see how the current ROCE for Kawan Food Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Kawan Food Berhad.
How Are Returns Trending?
In terms of Kawan Food Berhad's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 12%, but since then they've fallen to 9.1%. 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.
The Bottom Line On Kawan Food Berhad's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Kawan Food Berhad is reinvesting for growth and has higher sales as a result. However, despite the promising trends, the stock has fallen 22% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
Kawan Food Berhad could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.