If you're looking for a multi-bagger, there's a few things to keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in KOP's (Catalist:5I1) returns on capital, so let's have a look.
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. The formula for this calculation on KOP is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.028 = S$2.3m ÷ (S$192m - S$109m) (Based on the trailing twelve months to March 2023).
Thus, KOP has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 4.2%.
Check out our latest analysis for KOP
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'd like to look at how KOP has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is KOP's ROCE Trending?
Like most people, we're pleased that KOP is now generating some pretax earnings. The company was generating losses five years ago, but now it's turned around, earning 2.8% which is no doubt a relief for some early shareholders. In regards to capital employed, KOP is using 27% less capital than it was five years ago, which on the surface, can indicate that the business has become more efficient at generating these returns. This could potentially mean that the company is selling some of its assets.
On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. The current liabilities has increased to 57% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.
Our Take On KOP's ROCE
From what we've seen above, KOP has managed to increase it's returns on capital all the while reducing it's capital base. Astute investors may have an opportunity here because the stock has declined 39% in the last five years. So researching this company further and determining whether or not these trends will continue seems justified.