There Are Reasons To Feel Uneasy About Kimlun Corporation Berhad's (KLSE:KIMLUN) Returns On Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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 Kimlun Corporation Berhad (KLSE:KIMLUN) and its ROCE trend, we weren't exactly thrilled.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Kimlun Corporation Berhad:

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

0.028 = RM29m ÷ (RM1.7b - RM655m) (Based on the trailing twelve months to March 2024).

So, Kimlun Corporation Berhad has an ROCE of 2.8%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 8.6%.

Check out our latest analysis for Kimlun Corporation Berhad

Above you can see how the current ROCE for Kimlun Corporation 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 analyst report for Kimlun Corporation Berhad .

So How Is Kimlun Corporation Berhad's ROCE Trending?

On the surface, the trend of ROCE at Kimlun Corporation Berhad doesn't inspire confidence. Around five years ago the returns on capital were 12%, but since then they've fallen to 2.8%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that Kimlun Corporation Berhad is reinvesting for growth and has higher sales as a result. These trends are starting to be recognized by investors since the stock has delivered a 14% gain to shareholders who've held over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

On a final note, we've found 1 warning sign for Kimlun Corporation Berhad that we think you should be aware of.

While Kimlun Corporation 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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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com