Lotus KFM Berhad (KLSE:LOTUS) Shareholders Will Want The ROCE Trajectory To Continue

Did you know there are some financial metrics that can provide clues of a potential 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Lotus KFM Berhad (KLSE:LOTUS) looks quite promising in regards to its trends of return on capital.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Lotus KFM Berhad is:

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

0.021 = RM1.4m ÷ (RM78m - RM10m) (Based on the trailing twelve months to December 2020).

Therefore, Lotus KFM Berhad has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Food industry average of 7.3%.

View our latest analysis for Lotus KFM Berhad

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're interested in investigating Lotus KFM Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

We're delighted to see that Lotus KFM Berhad is reaping rewards from its investments and is now generating some pre-tax profits. The company was generating losses one year ago, but now it's earning 2.1% which is a sight for sore eyes. And unsurprisingly, like most companies trying to break into the black, Lotus KFM Berhad is utilizing 25% more capital than it was one year ago. This can tell us that the company has plenty of reinvestment opportunities that are able to generate higher returns.

One more thing to note, Lotus KFM Berhad has decreased current liabilities to 13% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Lotus KFM Berhad has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Key Takeaway

To the delight of most shareholders, Lotus KFM Berhad has now broken into profitability. Since the stock has returned a staggering 616% to shareholders over the last five years, it looks like investors are recognizing these changes. With that being said, we still think the promising fundamentals mean the company deserves some further due diligence.

Lotus KFM Berhad does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those doesn't sit too well with us...

While Lotus KFM 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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