Kuala Lumpur Kepong Berhad (KLSE:KLK) Is Looking To Continue Growing Its Returns On Capital

There are a few key trends to look for if we want to identify the next 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. So on that note, Kuala Lumpur Kepong Berhad (KLSE:KLK) looks quite promising in regards to its trends of return on capital.

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 Kuala Lumpur Kepong Berhad, this is the formula:

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

0.16 = RM3.5b ÷ (RM29b - RM7.2b) (Based on the trailing twelve months to December 2021).

Thus, Kuala Lumpur Kepong Berhad has an ROCE of 16%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 9.9% it's much better.

Check out our latest analysis for Kuala Lumpur Kepong Berhad

Above you can see how the current ROCE for Kuala Lumpur Kepong Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Kuala Lumpur Kepong Berhad here for free.

What Can We Tell From Kuala Lumpur Kepong Berhad's ROCE Trend?

Kuala Lumpur Kepong Berhad is displaying some positive trends. Over the last five years, returns on capital employed have risen substantially to 16%. Basically the business is earning more per dollar of capital invested and in addition to that, 36% more capital is being employed now too. So we're very much inspired by what we're seeing at Kuala Lumpur Kepong Berhad thanks to its ability to profitably reinvest capital.

In Conclusion...

To sum it up, Kuala Lumpur Kepong Berhad has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Investors may not be impressed by the favorable underlying trends yet because over the last five years the stock has only returned 20% to shareholders. So with that in mind, we think the stock deserves further research.

If you'd like to know more about Kuala Lumpur Kepong Berhad, we've spotted 3 warning signs, and 2 of them can't be ignored.

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.