Will Kejuruteraanstera Berhad (KLSE:KAB) Multiply In Value Going Forward?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Kejuruteraanstera Berhad (KLSE:KAB), we don't think it's current trends fit the mold of a multi-bagger.

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. The formula for this calculation on Kejuruteraanstera Berhad is:

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

0.12 = RM9.9m ÷ (RM144m - RM61m) (Based on the trailing twelve months to September 2020).

Therefore, Kejuruteraanstera Berhad has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 5.2% generated by the Construction industry.

View our latest analysis for Kejuruteraanstera Berhad

In the above chart we have measured Kejuruteraanstera Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For Kejuruteraanstera Berhad Tell Us?

When we looked at the ROCE trend at Kejuruteraanstera Berhad, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 12% from 43% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

On a related note, Kejuruteraanstera Berhad has decreased its current liabilities to 42% of total assets. That could partly explain why the ROCE has dropped. 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. Keep in mind 42% is still pretty high, so those risks are still somewhat prevalent.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Kejuruteraanstera Berhad's reinvestment in its own business, we're aware that returns are shrinking. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 790% gain to shareholders who have held over the last three years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Kejuruteraanstera Berhad does have some risks though, and we've spotted 1 warning sign for Kejuruteraanstera Berhad that you might be interested in.

While Kejuruteraanstera 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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