Returns Are Gaining Momentum At Kim Teck Cheong Consolidated Berhad (KLSE:KTC)

By
Simply Wall St
Published
April 05, 2022
KLSE:KTC

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Speaking of which, we noticed some great changes in Kim Teck Cheong Consolidated Berhad's (KLSE:KTC) returns on capital, so let's have a look.

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. 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)

0.14 = RM23m ÷ (RM307m - RM139m) (Based on the trailing twelve months to December 2021).

Therefore, Kim Teck Cheong Consolidated Berhad has an ROCE of 14%. In absolute terms, that's a satisfactory return, but compared to the Consumer Retailing industry average of 8.7% it's much better.

See our latest analysis for Kim Teck Cheong Consolidated Berhad

KLSE:KTC Return on Capital Employed April 5th 2022

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 want to delve into the historical earnings, revenue and cash flow of Kim Teck Cheong Consolidated Berhad, check out these free graphs here.

What Does the ROCE Trend For Kim Teck Cheong Consolidated Berhad Tell Us?

The trends we've noticed at Kim Teck Cheong Consolidated Berhad are quite reassuring. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 14%. 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 51%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 45%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So shareholders would be pleased that the growth in returns has mostly come from underlying business performance. Nevertheless, there are some potential risks the company is bearing with current liabilities that high, so just keep that in mind.

Our Take On Kim Teck Cheong Consolidated Berhad's ROCE

To sum it up, Kim Teck Cheong Consolidated Berhad has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Given the stock has declined 51% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

One more thing, we've spotted 2 warning signs facing Kim Teck Cheong Consolidated Berhad that you might find interesting.

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.