George Kent (Malaysia) Berhad's (KLSE:GKENT) Returns On Capital Not Reflecting Well On The Business

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. 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?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.08 = RM54m ÷ (RM812m - RM142m) (Based on the trailing twelve months to March 2023).

So, George Kent (Malaysia) Berhad has an ROCE of 8.0%. On its own that's a low return, but compared to the average of 5.5% generated by the Construction industry, it's much better.

View 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.

What Does the ROCE Trend For George Kent (Malaysia) Berhad Tell Us?

On the surface, the trend of ROCE at George Kent (Malaysia) Berhad doesn't inspire confidence. Over the last five years, returns on capital have decreased to 8.0% from 38% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a side note, George Kent (Malaysia) Berhad has done well to pay down its current liabilities to 17% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

Our Take On George Kent (Malaysia) Berhad's ROCE

In summary, we're somewhat concerned by George Kent (Malaysia) Berhad's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 63% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you want to know some of the risks facing George Kent (Malaysia) Berhad we've found 4 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

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.