To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. So when we looked at Kluang Rubber Company (Malaya) Berhad (KLSE:KLUANG) and its trend of ROCE, we really liked what we saw.
Return On Capital Employed (ROCE): What Is It?
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 Kluang Rubber Company (Malaya) Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.016 = RM21m ÷ (RM1.3b - RM15m) (Based on the trailing twelve months to December 2023).
So, Kluang Rubber Company (Malaya) Berhad has an ROCE of 1.6%. In absolute terms, that's a low return and it also under-performs the Food industry average of 7.5%.
View our latest analysis for Kluang Rubber Company (Malaya) Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Kluang Rubber Company (Malaya) Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Kluang Rubber Company (Malaya) Berhad.
How Are Returns Trending?
Even though ROCE is still low in absolute terms, it's good to see it's heading in the right direction. The figures show that over the last five years, ROCE has grown 115% whilst employing roughly the same amount of capital. Basically the business is generating higher returns from the same amount of capital and that is proof that there are improvements in the company's efficiencies. It's worth looking deeper into this though because while it's great that the business is more efficient, it might also mean that going forward the areas to invest internally for the organic growth are lacking.
What We Can Learn From Kluang Rubber Company (Malaya) Berhad's ROCE
To bring it all together, Kluang Rubber Company (Malaya) Berhad has done well to increase the returns it's generating from its capital employed. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 50% return over the last five years. In light of that, we think it's worth looking further into this stock because if Kluang Rubber Company (Malaya) Berhad can keep these trends up, it could have a bright future ahead.