Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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. With that in mind, we've noticed some promising trends at Kuala Lumpur Kepong Berhad (KLSE:KLK) so let's look a bit deeper.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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)
0.14 = RM3.5b ÷ (RM31b - RM6.5b) (Based on the trailing twelve months to June 2022).
Therefore, Kuala Lumpur Kepong Berhad has an ROCE of 14%. On its own, that's a standard return, however it's much better than the 12% generated by the Food industry.
See our latest analysis for Kuala Lumpur Kepong Berhad
In the above chart we have measured Kuala Lumpur Kepong Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
What The Trend Of ROCE Can Tell Us
Kuala Lumpur Kepong Berhad is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 14%. Basically the business is earning more per dollar of capital invested and in addition to that, 50% more capital is being employed now too. So we're very much inspired by what we're seeing at Kuala Lumpur Kepong Berhad thanks to its ability to profitably reinvest capital.
What We Can Learn From Kuala Lumpur Kepong Berhad's ROCE
A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Kuala Lumpur Kepong Berhad has. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. With that in mind, we believe the promising trends warrant this stock for further investigation.
Kuala Lumpur Kepong Berhad does have some risks, we noticed 3 warning signs (and 2 which are a bit unpleasant) we think you should know about.