Why The 29% Return On Capital At Kawan Renergy Berhad (KLSE:KENERGY) Should Have Your Attention

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, 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. And in light of that, the trends we're seeing at Kawan Renergy Berhad's (KLSE:KENERGY) look very promising so lets take a look.

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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. To calculate this metric for Kawan Renergy Berhad, this is the formula:

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

0.29 = RM27m ÷ (RM116m - RM23m) (Based on the trailing twelve months to January 2025).

Thus, Kawan Renergy Berhad has an ROCE of 29%. In absolute terms that's a great return and it's even better than the Machinery industry average of 7.8%.

See our latest analysis for Kawan Renergy Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kawan Renergy Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Kawan Renergy Berhad.

What Can We Tell From Kawan Renergy Berhad's ROCE Trend?

We like the trends that we're seeing from Kawan Renergy Berhad. The data shows that returns on capital have increased substantially over the last four years to 29%. The amount of capital employed has increased too, by 155%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a related note, the company's ratio of current liabilities to total assets has decreased to 20%, which basically reduces it's funding from the likes of short-term creditors or suppliers. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

What We Can Learn From Kawan Renergy Berhad's ROCE

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Kawan Renergy Berhad has. And since the stock has fallen 22% over the last year, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Kawan Renergy Berhad (of which 1 makes us a bit uncomfortable!) that you should know about.

Kawan Renergy Berhad is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.