Here's What To Make Of Kim Loong Resources Berhad's (KLSE:KMLOONG) Returns On Capital

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. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Kim Loong Resources Berhad (KLSE:KMLOONG), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Kim Loong Resources Berhad, this is the formula:

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

0.10 = RM96m ÷ (RM1.1b - RM94m) (Based on the trailing twelve months to July 2020).

Thus, Kim Loong Resources Berhad has an ROCE of 10%. In absolute terms, that's a satisfactory return, but compared to the Food industry average of 6.8% it's much better.

Check out our latest analysis for Kim Loong Resources Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kim Loong Resources Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Kim Loong Resources Berhad, check out these free graphs here.

So How Is Kim Loong Resources Berhad's ROCE Trending?

On the surface, the trend of ROCE at Kim Loong Resources Berhad doesn't inspire confidence. Over the last five years, returns on capital have decreased to 10% from 13% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. 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.

The Bottom Line

In summary, Kim Loong Resources Berhad is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Yet to long term shareholders the stock has gifted them an incredible 119% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

One more thing: We've identified 2 warning signs with Kim Loong Resources Berhad (at least 1 which makes us a bit uncomfortable) , and understanding these would certainly be useful.

While Kim Loong Resources 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. 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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