Kim Teck Cheong Consolidated Berhad (KLSE:KTC) Is Looking To Continue Growing Its Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. With that in mind, we've noticed some promising trends at Kim Teck Cheong Consolidated Berhad (KLSE:KTC) so let's look a bit deeper.

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. To calculate this metric for Kim Teck Cheong Consolidated Berhad, this is the formula:

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

0.17 = RM33m ÷ (RM325m - RM127m) (Based on the trailing twelve months to June 2022).

Thus, Kim Teck Cheong Consolidated Berhad has an ROCE of 17%. On its own, that's a standard return, however it's much better than the 8.3% generated by the Consumer Retailing industry.

Check out the opportunities and risks within the XX Consumer Retailing industry.

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kim Teck Cheong Consolidated Berhad's ROCE against it's prior returns. If you're interested in investigating Kim Teck Cheong Consolidated Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Kim Teck Cheong Consolidated Berhad's ROCE Trend?

Kim Teck Cheong Consolidated Berhad is displaying some positive trends. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 17%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 66%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

On a related note, the company's ratio of current liabilities to total assets has decreased to 39%, which basically reduces it's funding from the likes of short-term creditors or suppliers. Therefore we can rest assured that the growth in ROCE is a result of the business' fundamental improvements, rather than a cooking class featuring this company's books.

What We Can Learn From Kim Teck Cheong Consolidated Berhad's ROCE

In summary, it's great to see that Kim Teck Cheong Consolidated Berhad 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.

If you want to continue researching Kim Teck Cheong Consolidated Berhad, you might be interested to know about the 3 warning signs that our analysis has discovered.

While Kim Teck Cheong Consolidated Berhad 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.