Kobay Technology Bhd (KLSE:KOBAY) Is Looking To Continue Growing Its Returns On Capital

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. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Kobay Technology Bhd's (KLSE:KOBAY) returns on capital, so let's have a look.

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 Kobay Technology Bhd, this is the formula:

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

0.12 = RM28m ÷ (RM308m - RM67m) (Based on the trailing twelve months to December 2020).

So, Kobay Technology Bhd has an ROCE of 12%. That's a relatively normal return on capital, and it's around the 10% generated by the Machinery industry.

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

So How Is Kobay Technology Bhd's ROCE Trending?

The trends we've noticed at Kobay Technology Bhd are quite reassuring. The data shows that returns on capital have increased substantially over the last five years to 12%. The amount of capital employed 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.

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. Essentially the business now has suppliers or short-term creditors funding about 22% of its operations, which isn't ideal. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Key Takeaway

All in all, it's terrific to see that Kobay Technology Bhd is reaping the rewards from prior investments and is growing its capital base. Since the stock has returned a staggering 397% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Like most companies, Kobay Technology Bhd does come with some risks, and we've found 1 warning sign 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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