To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Kawan Food Berhad (KLSE:KAWAN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.
Return On Capital Employed (ROCE): What Is It?
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)
0.085 = RM34m ÷ (RM455m - RM51m) (Based on the trailing twelve months to March 2023).
So, Kawan Food Berhad has an ROCE of 8.5%. Even though it's in line with the industry average of 8.5%, it's still a low return by itself.
Check out 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.
What Does the ROCE Trend For Kawan Food Berhad Tell Us?
There are better returns on capital out there than what we're seeing at Kawan Food Berhad. Over the past five years, ROCE has remained relatively flat at around 8.5% and the business has deployed 27% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
The Key Takeaway
Long story short, while Kawan Food Berhad has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has declined 17% over the last five years, investors may not be too optimistic on this trend improving either. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.
While Kawan Food Berhad doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.