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. 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 Kumpulan Perangsang Selangor Berhad's (KLSE:KPS) returns on capital, so let's have a look.
What Is Return On Capital Employed (ROCE)?
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Kumpulan Perangsang Selangor Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.038 = RM64m ÷ (RM2.2b - RM510m) (Based on the trailing twelve months to September 2022).
Thus, Kumpulan Perangsang Selangor Berhad has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 8.3%.
See our latest analysis for Kumpulan Perangsang Selangor Berhad
Above you can see how the current ROCE for Kumpulan Perangsang Selangor 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 report on analyst forecasts for the company.
So How Is Kumpulan Perangsang Selangor Berhad's ROCE Trending?
Shareholders will be relieved that Kumpulan Perangsang Selangor Berhad has broken into profitability. While the business was unprofitable in the past, it's now turned things around and is earning 3.8% on its capital. On top of that, what's interesting is that the amount of capital being employed has remained steady, so the business hasn't needed to put any additional money to work to generate these higher returns. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.
For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. Effectively this means that suppliers or short-term creditors are now funding 23% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.