Returns On Capital At Kuala Lumpur Kepong Berhad (KLSE:KLK) Have Stalled

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over Kuala Lumpur Kepong Berhad's (KLSE:KLK) trend of ROCE, we liked what we saw.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Kuala Lumpur Kepong Berhad is:

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

0.11 = RM2.1b ÷ (RM24b - RM3.9b) (Based on the trailing twelve months to June 2021).

Thus, Kuala Lumpur Kepong Berhad has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 8.8% generated by the Food industry.

Check out our latest analysis for Kuala Lumpur Kepong Berhad

In the above chart we have measured Kuala Lumpur Kepong Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

How Are Returns Trending?

While the current returns on capital are decent, they haven't changed much. The company has employed 38% more capital in the last five years, and the returns on that capital have remained stable at 11%. Since 11% is a moderate ROCE though, it's good to see a business can continue to reinvest at these decent rates of return. Stable returns in this ballpark can be unexciting, but if they can be maintained over the long run, they often provide nice rewards to shareholders.

What We Can Learn From Kuala Lumpur Kepong Berhad's ROCE

To sum it up, Kuala Lumpur Kepong Berhad has simply been reinvesting capital steadily, at those decent rates of return. Despite the good fundamentals, total returns from the stock have been virtually flat over the last five years. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

Kuala Lumpur Kepong Berhad does have some risks, we noticed 4 warning signs (and 1 which can't be ignored) we think you should know about.

While Kuala Lumpur Kepong Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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.

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