Slowing Rates Of Return At Kuala Lumpur Kepong Berhad (KLSE:KLK) Leave Little Room For Excitement

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at Kuala Lumpur Kepong Berhad (KLSE:KLK) and its ROCE trend, we weren't exactly thrilled.

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. 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)

0.086 = RM2.2b ÷ (RM30b - RM4.8b) (Based on the trailing twelve months to June 2023).

Thus, Kuala Lumpur Kepong Berhad has an ROCE of 8.6%. In absolute terms, that's a low return, but it's much better than the Food industry average of 6.8%.

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.

The Trend Of ROCE

There are better returns on capital out there than what we're seeing at Kuala Lumpur Kepong Berhad. Over the past five years, ROCE has remained relatively flat at around 8.6% and the business has deployed 56% more capital into its operations. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

In Conclusion...

In summary, Kuala Lumpur Kepong Berhad has simply been reinvesting capital and generating the same low rate of return as before. Unsurprisingly, the stock has only gained 3.8% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

One more thing, we've spotted 3 warning signs facing Kuala Lumpur Kepong Berhad that you might find interesting.

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. 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.