There Are Reasons To Feel Uneasy About Kobay Technology Bhd's (KLSE:KOBAY) Returns On Capital

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. Although, when we looked at Kobay Technology Bhd (KLSE:KOBAY), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

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

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

0.055 = RM25m ÷ (RM612m - RM157m) (Based on the trailing twelve months to September 2024).

So, Kobay Technology Bhd has an ROCE of 5.5%. Ultimately, that's a low return and it under-performs the Machinery industry average of 8.3%.

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 Kobay Technology Bhd's past earnings, revenue and cash flow.

How Are Returns Trending?

When we looked at the ROCE trend at Kobay Technology Bhd, we didn't gain much confidence. Around five years ago the returns on capital were 11%, but since then they've fallen to 5.5%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On Kobay Technology Bhd's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Kobay Technology Bhd. And the stock has done incredibly well with a 154% return over the last five years, so long term investors are no doubt ecstatic with that result. So should these growth trends continue, we'd be optimistic on the stock going forward.

Kobay Technology Bhd does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those is a bit unpleasant...

While Kobay Technology Bhd isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.