Is Kobay Technology Bhd (KLSE:KOBAY) A Future Multi-bagger?

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. So on that note, Kobay Technology Bhd (KLSE:KOBAY) looks quite promising in regards to its trends of return on capital.

Understanding 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 Kobay Technology Bhd, this is the formula:

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

0.13 = RM31m ÷ (RM277m - RM42m) (Based on the trailing twelve months to September 2020).

Thus, Kobay Technology Bhd has an ROCE of 13%. On its own, that's a standard return, however it's much better than the 10% generated by the Machinery industry.

See our latest analysis for Kobay Technology Bhd

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'd like to look at how Kobay Technology Bhd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

Investors would be pleased with what's happening at Kobay Technology Bhd. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 13%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 52%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line On Kobay Technology Bhd's ROCE

To sum it up, Kobay Technology Bhd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 77% return over the last five years. In light of that, we think it's worth looking further into this stock because if Kobay Technology Bhd can keep these trends up, it could have a bright future ahead.

If you'd like to know about the risks facing Kobay Technology Bhd, we've discovered 2 warning signs that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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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