Investors Could Be Concerned With Kawan Food Berhad's (KLSE:KAWAN) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Kawan Food Berhad (KLSE:KAWAN) and its ROCE trend, we weren't exactly thrilled.

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

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. The formula for this calculation on Kawan Food Berhad is:

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

0.093 = RM35m ÷ (RM435m - RM55m) (Based on the trailing twelve months to March 2022).

Thus, Kawan Food Berhad has an ROCE of 9.3%. In absolute terms, that's a low return but it's around the Food industry average of 11%.

Check out our latest analysis for Kawan Food Berhad

In the above chart we have measured Kawan Food Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Kawan Food Berhad here for free.

The Trend Of ROCE

In terms of Kawan Food Berhad's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 9.3% from 14% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Kawan Food Berhad's reinvestment in its own business, we're aware that returns are shrinking. And in the last five years, the stock has given away 33% 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.

If you're still interested in Kawan Food Berhad it's worth checking out our FREE intrinsic value approximation to see if it's trading at an attractive price in other respects.

While Kawan Food 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.