Kobay Technology Bhd (KLSE:KOBAY) Is Reinvesting At Lower Rates Of Return

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Kobay Technology Bhd (KLSE:KOBAY), it didn't seem to tick all of these boxes.

What Is 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. The formula for this calculation on Kobay Technology Bhd is:

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

0.059 = RM26m ÷ (RM572m - RM124m) (Based on the trailing twelve months to September 2023).

So, Kobay Technology Bhd has an ROCE of 5.9%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 8.2%.

View our latest analysis for Kobay Technology Bhd

Above you can see how the current ROCE for Kobay Technology Bhd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Kobay Technology Bhd, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 5.9% from 11% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

In Conclusion...

In summary, we're somewhat concerned by Kobay Technology Bhd's diminishing returns on increasing amounts of capital. The market must be rosy on the stock's future because even though the underlying trends aren't too encouraging, the stock has soared 204%. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Kobay Technology Bhd does have some risks though, and we've spotted 2 warning signs for Kobay Technology Bhd that you might be interested in.

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.