The Returns At Kumpulan H & L High-Tech Berhad (KLSE:HIGHTEC) Aren't Growing

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Although, when we looked at Kumpulan H & L High-Tech Berhad (KLSE:HIGHTEC), it didn't seem to tick all of these boxes.

What Is 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. Analysts use this formula to calculate it for Kumpulan H & L High-Tech Berhad:

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

0.049 = RM7.9m ÷ (RM167m - RM4.4m) (Based on the trailing twelve months to October 2022).

So, Kumpulan H & L High-Tech Berhad has an ROCE of 4.9%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 14%.

View our latest analysis for Kumpulan H & L High-Tech 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'd like to look at how Kumpulan H & L High-Tech Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

The returns on capital haven't changed much for Kumpulan H & L High-Tech Berhad in recent years. Over the past five years, ROCE has remained relatively flat at around 4.9% and the business has deployed 66% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

Our Take On Kumpulan H & L High-Tech Berhad's ROCE

In summary, Kumpulan H & L High-Tech Berhad has simply been reinvesting capital and generating the same low rate of return as before. Yet to long term shareholders the stock has gifted them an incredible 201% return in the last five years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

One more thing to note, we've identified 3 warning signs with Kumpulan H & L High-Tech Berhad and understanding these should be part of your investment process.

While Kumpulan H & L High-Tech Berhad isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.