Investors Met With Slowing Returns on Capital At Kuala Lumpur Kepong Berhad (KLSE:KLK)
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. In light of that, when we looked at Kuala Lumpur Kepong Berhad (KLSE:KLK) and its ROCE trend, we weren't exactly thrilled.
What Is Return On Capital Employed (ROCE)?
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 Kuala Lumpur Kepong Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.062 = RM1.6b ÷ (RM31b - RM5.9b) (Based on the trailing twelve months to December 2023).
So, Kuala Lumpur Kepong Berhad has an ROCE of 6.2%. On its own, that's a low figure but it's around the 6.9% average generated by the Food industry.
See 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're interested, you can view the analysts predictions in our free analyst report for Kuala Lumpur Kepong Berhad .
What Can We Tell From Kuala Lumpur Kepong Berhad's ROCE Trend?
There are better returns on capital out there than what we're seeing at Kuala Lumpur Kepong Berhad. Over the past five years, ROCE has remained relatively flat at around 6.2% and the business has deployed 61% more capital into its operations. Given the company has increased the amount of capital employed, it appears the investments that have been made simply don't provide a high return on capital.
In Conclusion...
Long story short, while Kuala Lumpur Kepong Berhad has been reinvesting its capital, the returns that it's generating haven't increased. And investors may be recognizing these trends since the stock has only returned a total of 5.2% to shareholders over the last five years. As a result, if you're hunting for a multi-bagger, we think you'd have more luck elsewhere.
If you want to know some of the risks facing Kuala Lumpur Kepong Berhad we've found 3 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.
While Kuala Lumpur Kepong Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.