George Kent (Malaysia) Berhad (KLSE:GKENT) May Have Issues Allocating Its Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at George Kent (Malaysia) Berhad (KLSE:GKENT), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on George Kent (Malaysia) Berhad is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.11 = RM75m ÷ (RM870m - RM192m) (Based on the trailing twelve months to March 2022).

Therefore, George Kent (Malaysia) Berhad has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 5.3% it's much better.

Check out our latest analysis for George Kent (Malaysia) Berhad

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating George Kent (Malaysia) Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is George Kent (Malaysia) Berhad's ROCE Trending?

When we looked at the ROCE trend at George Kent (Malaysia) Berhad, we didn't gain much confidence. Around five years ago the returns on capital were 36%, but since then they've fallen to 11%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a side note, George Kent (Malaysia) Berhad has done well to pay down its current liabilities to 22% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On George Kent (Malaysia) Berhad's ROCE

While returns have fallen for George Kent (Malaysia) Berhad in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. But since the stock has dived 74% in the last five years, there could be other drivers that are influencing the business' outlook. Therefore, we'd suggest researching the stock further to uncover more about the business.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 5 warning signs for George Kent (Malaysia) Berhad (of which 2 don't sit too well with us!) that you should know about.

While George Kent (Malaysia) 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.