The Returns At KNM Group Berhad (KLSE:KNM) Aren't Growing

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. However, after investigating KNM Group Berhad (KLSE:KNM), we don't think it's current trends fit the mold of a multi-bagger.

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 KNM Group Berhad, this is the formula:

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

0.044 = RM120m ÷ (RM3.9b - RM1.2b) (Based on the trailing twelve months to March 2021).

So, KNM Group Berhad has an ROCE of 4.4%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 8.8%.

View our latest analysis for KNM Group Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for KNM Group Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of KNM Group Berhad, check out these free graphs here.

The Trend Of ROCE

Things have been pretty stable at KNM Group Berhad, with its capital employed and returns on that capital staying somewhat the same for the last five years. It's not uncommon to see this when looking at a mature and stable business that isn't re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn't expect KNM Group Berhad to be a multi-bagger going forward.

The Key Takeaway

In a nutshell, KNM Group Berhad has been trudging along with the same returns from the same amount of capital over the last five years. And in the last five years, the stock has given away 59% so the market doesn't look too hopeful on these trends strengthening any time soon. All in all, the inherent trends aren't typical of multi-baggers, so if that's what you're after, we think you might have more luck elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for KNM Group Berhad (of which 1 can't be ignored!) that you should know about.

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. 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.
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