There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Having said that, from a first glance at Kuala Lumpur Kepong Berhad (KLSE:KLK) 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?
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. Analysts use this formula to calculate it for Kuala Lumpur Kepong Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.067 = RM1.7b ÷ (RM32b - RM6.1b) (Based on the trailing twelve months to June 2024).
Thus, Kuala Lumpur Kepong Berhad has an ROCE of 6.7%. Ultimately, that's a low return and it under-performs the Food industry average of 8.8%.
View our latest analysis for Kuala Lumpur Kepong Berhad
Above you can see how the current ROCE for Kuala Lumpur Kepong 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 analyst report for Kuala Lumpur Kepong Berhad .
What Can We Tell From Kuala Lumpur Kepong Berhad's ROCE Trend?
The returns on capital haven't changed much for Kuala Lumpur Kepong Berhad in recent years. The company has employed 65% more capital in the last five years, and the returns on that capital have remained stable at 6.7%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.
Our Take On Kuala Lumpur Kepong Berhad's ROCE
In conclusion, Kuala Lumpur Kepong Berhad has been investing more capital into the business, but returns on that capital haven't increased. And with the stock having returned a mere 5.3% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.
Kuala Lumpur Kepong Berhad does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are a bit unpleasant...