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

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Speaking of which, we noticed some great changes in Kobay Technology Bhd's (KLSE:KOBAY) returns on capital, so let's have a look.

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 Kobay Technology Bhd:

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

0.11 = RM28m ÷ (RM298m - RM50m) (Based on the trailing twelve months to March 2021).

Therefore, Kobay Technology Bhd has an ROCE of 11%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 9.3% it's much better.

See our latest analysis for Kobay Technology Bhd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kobay Technology Bhd's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Kobay Technology Bhd, check out these free graphs here.

What Can We Tell From Kobay Technology Bhd's ROCE Trend?

Kobay Technology Bhd is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 11%. The amount of capital employed has increased too, by 60%. So we're very much inspired by what we're seeing at Kobay Technology Bhd thanks to its ability to profitably reinvest capital.

The Bottom Line On Kobay Technology Bhd's ROCE

In summary, it's great to see that Kobay Technology Bhd can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 960% 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.

One more thing to note, we've identified 1 warning sign with Kobay Technology Bhd and understanding it should be part of your investment process.

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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