Does Knusford Berhad (KLSE:KNUSFOR) Have The Makings Of A Multi-Bagger?

What trends should we look for it we want to identify stocks that can 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. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Knusford Berhad's (KLSE:KNUSFOR) returns on capital, so let's have a look.

Return On Capital Employed (ROCE): What is it?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Knusford Berhad, this is the formula:

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

0.036 = RM8.4m ÷ (RM418m - RM185m) (Based on the trailing twelve months to December 2020).

So, Knusford Berhad has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 6.2%.

See our latest analysis for Knusford Berhad

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

So How Is Knusford Berhad's ROCE Trending?

While the ROCE is still rather low for Knusford Berhad, we're glad to see it heading in the right direction. The data shows that returns on capital have increased by 254% over the trailing five years. The company is now earning RM0.04 per dollar of capital employed. In regards to capital employed, Knusford Berhad appears to been achieving more with less, since the business is using 21% less capital to run its operation. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Essentially the business now has suppliers or short-term creditors funding about 44% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

What We Can Learn From Knusford Berhad's ROCE

From what we've seen above, Knusford Berhad has managed to increase it's returns on capital all the while reducing it's capital base. Given the stock has declined 24% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

If you want to continue researching Knusford Berhad, you might be interested to know about the 3 warning signs that our analysis has discovered.

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. 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.
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