Kumpulan Kitacon Berhad (KLSE:KITACON) Is Reinvesting At Lower Rates Of Return

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, 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. Although, when we looked at Kumpulan Kitacon Berhad (KLSE:KITACON), it didn't seem to tick all of these boxes.

Understanding 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. To calculate this metric for Kumpulan Kitacon Berhad, this is the formula:

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

0.19 = RM65m ÷ (RM664m - RM328m) (Based on the trailing twelve months to December 2024).

Thus, Kumpulan Kitacon Berhad has an ROCE of 19%. On its own, that's a standard return, however it's much better than the 8.9% generated by the Construction industry.

Check out our latest analysis for Kumpulan Kitacon Berhad

In the above chart we have measured Kumpulan Kitacon Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Kumpulan Kitacon Berhad .

What The Trend Of ROCE Can Tell Us

In terms of Kumpulan Kitacon Berhad's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 19% from 27% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Another thing to note, Kumpulan Kitacon Berhad has a high ratio of current liabilities to total assets of 49%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line On Kumpulan Kitacon Berhad's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Kumpulan Kitacon Berhad is reinvesting for growth and has higher sales as a result. And the stock has followed suit returning a meaningful 32% to shareholders over the last year. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Like most companies, Kumpulan Kitacon Berhad does come with some risks, and we've found 2 warning signs that you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.