Stock Analysis

Returns On Capital Are Showing Encouraging Signs At Kretam Holdings Berhad (KLSE:KRETAM)

KLSE:KRETAM
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If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. Speaking of which, we noticed some great changes in Kretam Holdings Berhad's (KLSE:KRETAM) returns on capital, so let's have a look.

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. To calculate this metric for Kretam Holdings Berhad, this is the formula:

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

0.12 = RM89m ÷ (RM836m - RM117m) (Based on the trailing twelve months to June 2021).

Thus, Kretam Holdings Berhad has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 8.5% generated by the Food industry.

View our latest analysis for Kretam Holdings Berhad

roce
KLSE:KRETAM Return on Capital Employed October 8th 2021

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Kretam Holdings Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

We're pretty happy with how the ROCE has been trending at Kretam Holdings Berhad. The data shows that returns on capital have increased by 1,167% over the trailing five years. The company is now earning RM0.1 per dollar of capital employed. Interestingly, the business may be becoming more efficient because it's applying 31% less capital than it was five years ago. A business that's shrinking its asset base like this isn't usually typical of a soon to be multi-bagger company.

The Bottom Line On Kretam Holdings Berhad's ROCE

In the end, Kretam Holdings Berhad has proven it's capital allocation skills are good with those higher returns from less amount of capital. Considering the stock has delivered 23% 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. So with that in mind, we think the stock deserves further research.

Kretam Holdings Berhad does have some risks though, and we've spotted 1 warning sign for Kretam Holdings Berhad that you might be interested in.

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.

Valuation is complex, but we're helping make it simple.

Find out whether Kretam Holdings Berhad is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.

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