Returns On Capital Are Showing Encouraging Signs At Kumpulan Perangsang Selangor Berhad (KLSE:KPS)

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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 when we looked at Kumpulan Perangsang Selangor Berhad (KLSE:KPS) and its trend of ROCE, we really liked what we saw.

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 Kumpulan Perangsang Selangor Berhad, this is the formula:

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

0.032 = RM55m ÷ (RM2.1b - RM355m) (Based on the trailing twelve months to March 2023).

Therefore, Kumpulan Perangsang Selangor Berhad has an ROCE of 3.2%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 8.2%.

See our latest analysis for Kumpulan Perangsang Selangor Berhad

In the above chart we have measured Kumpulan Perangsang Selangor Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

SWOT Analysis for Kumpulan Perangsang Selangor Berhad

What Does the ROCE Trend For Kumpulan Perangsang Selangor Berhad Tell Us?

We're delighted to see that Kumpulan Perangsang Selangor Berhad is reaping rewards from its investments and has now broken into profitability. The company now earns 3.2% on its capital, because five years ago it was incurring losses. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. That being said, while an increase in efficiency is no doubt appealing, it'd be helpful to know if the company does have any investment plans going forward. So if you're looking for high growth, you'll want to see a business's capital employed also increasing.

What We Can Learn From Kumpulan Perangsang Selangor Berhad's ROCE

To bring it all together, Kumpulan Perangsang Selangor Berhad has done well to increase the returns it's generating from its capital employed. Astute investors may have an opportunity here because the stock has declined 26% in the last five years. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you'd like to know more about Kumpulan Perangsang Selangor Berhad, we've spotted 4 warning signs, and 1 of them doesn't sit too well with us.

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. 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.