What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Kim Hin Joo (Malaysia) Berhad (KLSE:KHJB) and its ROCE trend, we weren't exactly thrilled.
What Is 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. To calculate this metric for Kim Hin Joo (Malaysia) Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.082 = RM7.7m ÷ (RM119m - RM26m) (Based on the trailing twelve months to December 2022).
Therefore, Kim Hin Joo (Malaysia) Berhad has an ROCE of 8.2%. In absolute terms, that's a low return and it also under-performs the Specialty Retail industry average of 19%.
View our latest analysis for Kim Hin Joo (Malaysia) Berhad
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Kim Hin Joo (Malaysia) Berhad, check out these free graphs here.
What The Trend Of ROCE Can Tell Us
On the surface, the trend of ROCE at Kim Hin Joo (Malaysia) Berhad doesn't inspire confidence. Over the last five years, returns on capital have decreased to 8.2% from 26% 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. If these investments prove successful, this can bode very well for long term stock performance.
Our Take On Kim Hin Joo (Malaysia) Berhad's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Kim Hin Joo (Malaysia) Berhad is reinvesting for growth and has higher sales as a result. Furthermore the stock has climbed 34% over the last three years, it would appear that investors are upbeat about the future. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.
Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Kim Hin Joo (Malaysia) Berhad (of which 1 is potentially serious!) that you should know about.