Investors Could Be Concerned With Kossan Rubber Industries Bhd's (KLSE:KOSSAN) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. Although, when we looked at Kossan Rubber Industries Bhd (KLSE:KOSSAN), it didn't seem to tick all of these boxes.

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Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Kossan Rubber Industries Bhd is:

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

0.042 = RM159m ÷ (RM4.1b - RM294m) (Based on the trailing twelve months to December 2024).

Thus, Kossan Rubber Industries Bhd has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 8.3%.

View our latest analysis for Kossan Rubber Industries Bhd

In the above chart we have measured Kossan Rubber Industries Bhd'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 analyst report for Kossan Rubber Industries Bhd .

The Trend Of ROCE

On the surface, the trend of ROCE at Kossan Rubber Industries Bhd doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.2% from 17% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, Kossan Rubber Industries Bhd has done well to pay down its current liabilities to 7.2% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Kossan Rubber Industries Bhd. These growth trends haven't led to growth returns though, since the stock has fallen 15% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

If you'd like to know more about Kossan Rubber Industries Bhd, we've spotted 2 warning signs, and 1 of them is concerning.

While Kossan Rubber Industries Bhd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.