Kossan Rubber Industries Bhd (KLSE:KOSSAN) Could Be Struggling To Allocate 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. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Kossan Rubber Industries Bhd (KLSE:KOSSAN) and its ROCE trend, we weren't exactly thrilled.

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. Analysts use this formula to calculate it for Kossan Rubber Industries Bhd:

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

0.022 = RM87m ÷ (RM4.2b - RM197m) (Based on the trailing twelve months to March 2024).

Therefore, Kossan Rubber Industries Bhd has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Medical Equipment industry average of 8.4%.

View our latest analysis for Kossan Rubber Industries Bhd

Above you can see how the current ROCE for Kossan Rubber Industries Bhd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Kossan Rubber Industries Bhd .

So How Is Kossan Rubber Industries Bhd's ROCE Trending?

In terms of Kossan Rubber Industries Bhd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 17% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Kossan Rubber Industries Bhd has done well to pay down its current liabilities to 4.7% of total assets. That could partly explain why the ROCE has dropped. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

In summary, we're somewhat concerned by Kossan Rubber Industries Bhd's diminishing returns on increasing amounts of capital. However the stock has delivered a 50% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

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

While Kossan Rubber Industries Bhd 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. 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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