Does Kobay Technology Bhd. (KLSE:KOBAY) Create Value For Shareholders?

Today we are going to look at Kobay Technology Bhd. (KLSE:KOBAY) to see whether it might be an attractive investment prospect. Specifically, we’re going to calculate its Return On Capital Employed (ROCE), in the hopes of getting some insight into the business.

First up, we’ll look at what ROCE is and how we calculate it. Then we’ll compare its ROCE to similar companies. Finally, we’ll look at how its current liabilities affect its ROCE.

What is Return On Capital Employed (ROCE)?

ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. In general, businesses with a higher ROCE are usually better quality. In brief, it is a useful tool, but it is not without drawbacks. Author Edwin Whiting says to be careful when comparing the ROCE of different businesses, since ‘No two businesses are exactly alike.

How Do You Calculate Return On Capital Employed?

The formula for calculating the return on capital employed is:

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

Or for Kobay Technology Bhd:

0.11 = RM23m ÷ (RM265m – RM55m) (Based on the trailing twelve months to September 2019.)

So, Kobay Technology Bhd has an ROCE of 11%.

View our latest analysis for Kobay Technology Bhd

Does Kobay Technology Bhd Have A Good ROCE?

When making comparisons between similar businesses, investors may find ROCE useful. It appears that Kobay Technology Bhd’s ROCE is fairly close to the Machinery industry average of 11%. Aside from the industry comparison, Kobay Technology Bhd’s ROCE is mediocre in absolute terms, considering the risk of investing in stocks versus the safety of a bank account. Investors may wish to consider higher-performing investments.

Our data shows that Kobay Technology Bhd currently has an ROCE of 11%, compared to its ROCE of 0.3% 3 years ago. This makes us think about whether the company has been reinvesting shrewdly. The image below shows how Kobay Technology Bhd’s ROCE compares to its industry, and you can click it to see more detail on its past growth.

KLSE:KOBAY Past Revenue and Net Income, January 14th 2020
KLSE:KOBAY Past Revenue and Net Income, January 14th 2020

Remember that this metric is backwards looking – it shows what has happened in the past, and does not accurately predict the future. ROCE can be deceptive for cyclical businesses, as returns can look incredible in boom times, and terribly low in downturns. ROCE is, after all, simply a snap shot of a single year. If Kobay Technology Bhd is cyclical, it could make sense to check out this free graph of past earnings, revenue and cash flow.

Kobay Technology Bhd’s Current Liabilities And Their Impact On Its ROCE

Current liabilities include invoices, such as supplier payments, short-term debt, or a tax bill, that need to be paid within 12 months. Due to the way ROCE is calculated, a high level of current liabilities makes a company look as though it has less capital employed, and thus can (sometimes unfairly) boost the ROCE. To check the impact of this, we calculate if a company has high current liabilities relative to its total assets.

Kobay Technology Bhd has total assets of RM265m and current liabilities of RM55m. As a result, its current liabilities are equal to approximately 21% of its total assets. This is a modest level of current liabilities, which would only have a small effect on ROCE.

Our Take On Kobay Technology Bhd’s ROCE

With that in mind, we’re not overly impressed with Kobay Technology Bhd’s ROCE, so it may not be the most appealing prospect. But note: make sure you look for a great company, not just the first idea you come across. So take a peek at this free list of interesting companies with strong recent earnings growth (and a P/E ratio below 20).

For those who like to find winning investments this free list of growing companies with recent insider purchasing, could be just the ticket.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. 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. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.