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

There are a few key trends to look for if we want to identify the next multi-bagger. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. With that in mind, we've noticed some promising trends at Knusford Berhad (KLSE:KNUSFOR) so let's look a bit deeper.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.00085 = RM184k ÷ (RM430m - RM213m) (Based on the trailing twelve months to June 2023).

Therefore, Knusford Berhad has an ROCE of 0.08%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 5.2%.

View 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're interested in investigating Knusford Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Knusford Berhad's ROCE Trend?

Knusford Berhad has broken into the black (profitability) and we're sure it's a sight for sore eyes. While the business was unprofitable in the past, it's now turned things around and is earning 0.08% on its capital. While returns have increased, the amount of capital employed by Knusford Berhad has remained flat over the period. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

For the record though, there was a noticeable increase in the company's current liabilities over the period, so we would attribute some of the ROCE growth to that. The current liabilities has increased to 50% of total assets, so the business is now more funded by the likes of its suppliers or short-term creditors. Given it's pretty high ratio, we'd remind investors that having current liabilities at those levels can bring about some risks in certain businesses.

Our Take On Knusford Berhad's ROCE

As discussed above, Knusford Berhad appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 18% to shareholders. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

Knusford Berhad does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is potentially serious...

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.