Stock Analysis

The Return Trends At Kuala Lumpur Kepong Berhad (KLSE:KLK) Look Promising

KLSE:KLK
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Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. 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 looked at Kuala Lumpur Kepong Berhad (KLSE:KLK) and its trend of ROCE, we really liked what we saw.

What is 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. Analysts use this formula to calculate it for Kuala Lumpur Kepong Berhad:

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

0.15 = RM3.6b ÷ (RM31b - RM6.4b) (Based on the trailing twelve months to March 2022).

Therefore, Kuala Lumpur Kepong Berhad has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 11% generated by the Food industry.

Check out our latest analysis for Kuala Lumpur Kepong Berhad

roce
KLSE:KLK Return on Capital Employed June 8th 2022

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'd like to see what analysts are forecasting going forward, you should check out our free report for Kuala Lumpur Kepong Berhad.

What The Trend Of ROCE Can Tell Us

We like the trends that we're seeing from Kuala Lumpur Kepong Berhad. The data shows that returns on capital have increased substantially over the last five years to 15%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 48%. 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...

In summary, it's great to see that Kuala Lumpur Kepong Berhad can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Considering the stock has delivered 16% to its stockholders over the last five years, it may be fair to think that investors aren't fully aware of the promising trends yet. Given that, we'd look further into this stock in case it has more traits that could make it multiply in the long term.

On a final note, we found 3 warning signs for Kuala Lumpur Kepong Berhad (2 are significant) you should be aware of.

While Kuala Lumpur Kepong 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.

Valuation is complex, but we're here to simplify it.

Discover if Kuala Lumpur Kepong Berhad might be undervalued or overvalued with our detailed analysis, featuring fair value estimates, potential risks, dividends, insider trades, and its financial condition.

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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.