Returns On Capital Are Showing Encouraging Signs At Knusford Berhad (KLSE:KNUSFOR)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So when we looked at Knusford Berhad (KLSE:KNUSFOR) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for Knusford Berhad:

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

0.0074 = RM1.7m ÷ (RM433m - RM205m) (Based on the trailing twelve months to September 2021).

Thus, Knusford Berhad has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 4.2%.

See our latest analysis for Knusford Berhad

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Knusford Berhad, check out these free graphs here.

The Trend Of ROCE

Shareholders will be relieved that Knusford Berhad has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 0.7%, which is always encouraging. While returns have increased, the amount of capital employed by Knusford Berhad has remained flat over the period. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

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 47% of its operations, which isn't ideal. And with current liabilities at those levels, that's pretty high.

The Key Takeaway

In summary, we're delighted to see that Knusford Berhad has been able to increase efficiencies and earn higher rates of return on the same amount of capital. And since the stock has fallen 47% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

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

While Knusford 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.