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. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So when we looked at Kencana Agri (SGX:BNE) and its trend of ROCE, we really liked what we saw.
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. To calculate this metric for Kencana Agri, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.12 = US$24m ÷ (US$300m - US$92m) (Based on the trailing twelve months to December 2022).
Thus, Kencana Agri has an ROCE of 12%. By itself that's a normal return on capital and it's in line with the industry's average returns of 12%.
View our latest analysis for Kencana Agri
Historical performance is a great place to start when researching a stock so above you can see the gauge for Kencana Agri's ROCE against it's prior returns. If you're interested in investigating Kencana Agri's past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
We're pretty happy with how the ROCE has been trending at Kencana Agri. The data shows that returns on capital have increased by 52% over the trailing five years. The company is now earning US$0.1 per dollar of capital employed. In regards to capital employed, Kencana Agri appears to been achieving more with less, since the business is using 29% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.
The Key Takeaway
In the end, Kencana Agri has proven it's capital allocation skills are good with those higher returns from less amount of capital. Given the stock has declined 52% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.
If you'd like to know more about Kencana Agri, we've spotted 4 warning signs, and 2 of them are a bit concerning.