There are a few key trends to look for if we want to identify the next multi-bagger. 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. In light of that, when we looked at Rhong Khen International Berhad (KLSE:RKI) and its ROCE trend, we weren't exactly thrilled.
Return On Capital Employed (ROCE): What Is It?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Rhong Khen International Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.015 = RM11m ÷ (RM820m - RM100m) (Based on the trailing twelve months to December 2023).
Thus, Rhong Khen International Berhad has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 10%.
See our latest analysis for Rhong Khen International Berhad
Above you can see how the current ROCE for Rhong Khen International Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Rhong Khen International Berhad .
How Are Returns Trending?
When we looked at the ROCE trend at Rhong Khen International Berhad, we didn't gain much confidence. Around five years ago the returns on capital were 4.9%, but since then they've fallen to 1.5%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.
On a related note, Rhong Khen International Berhad has decreased its current liabilities to 12% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.