There Are Reasons To Feel Uneasy About Kumpulan H & L High-Tech Berhad's (KLSE:HIGHTEC) Returns On Capital

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base 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 Kumpulan H & L High-Tech Berhad (KLSE:HIGHTEC) and its ROCE trend, we weren't exactly thrilled.

We've discovered 2 warning signs about Kumpulan H & L High-Tech Berhad. View them for free.

Return On Capital Employed (ROCE): What Is It?

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. The formula for this calculation on Kumpulan H & L High-Tech Berhad is:

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

0.026 = RM4.5m ÷ (RM177m - RM4.8m) (Based on the trailing twelve months to January 2025).

Therefore, Kumpulan H & L High-Tech Berhad has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Machinery industry average of 8.2%.

Check out 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're interested in investigating Kumpulan H & L High-Tech Berhad's past further, check out this free graph covering Kumpulan H & L High-Tech Berhad's past earnings, revenue and cash flow.

What Can We Tell From Kumpulan H & L High-Tech Berhad's ROCE Trend?

On the surface, the trend of ROCE at Kumpulan H & L High-Tech Berhad doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.6% from 4.0% five years ago. However it looks like Kumpulan H & L High-Tech Berhad might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Key Takeaway

Bringing it all together, while we're somewhat encouraged by Kumpulan H & L High-Tech Berhad's reinvestment in its own business, we're aware that returns are shrinking. Yet to long term shareholders the stock has gifted them an incredible 159% 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.

If you'd like to know more about Kumpulan H & L High-Tech Berhad, we've spotted 2 warning signs, and 1 of them can't be ignored.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.