Investors Will Want Kelington Group Berhad's (KLSE:KGB) Growth In ROCE To Persist

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. So when we looked at Kelington Group Berhad (KLSE:KGB) and its trend of ROCE, we really liked what we saw.

Understanding 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 Kelington Group Berhad is:

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

0.11 = RM23m ÷ (RM351m - RM150m) (Based on the trailing twelve months to December 2020).

Thus, Kelington Group Berhad has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 4.8% it's much better.

View our latest analysis for Kelington Group Berhad

Above you can see how the current ROCE for Kelington Group Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Kelington Group Berhad's ROCE Trending?

Investors would be pleased with what's happening at Kelington Group Berhad. Over the last five years, returns on capital employed have risen substantially to 11%. Basically the business is earning more per dollar of capital invested and in addition to that, 235% more capital is being employed now too. So we're very much inspired by what we're seeing at Kelington Group Berhad thanks to its ability to profitably reinvest capital.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 43%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books. However, current liabilities are still at a pretty high level, so just be aware that this can bring with it some risks.

The Bottom Line

All in all, it's terrific to see that Kelington Group Berhad is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 788% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Kelington Group Berhad does have some risks though, and we've spotted 3 warning signs for Kelington Group Berhad that you might be interested in.

While Kelington Group 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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