Kossan Rubber Industries Bhd (KLSE:KOSSAN) Could Be Struggling To Allocate Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. In light of that, when we looked at Kossan Rubber Industries Bhd (KLSE:KOSSAN) and its ROCE trend, we weren't exactly thrilled.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.031 = RM124m ÷ (RM4.2b - RM233m) (Based on the trailing twelve months to June 2024).

Therefore, Kossan Rubber Industries Bhd has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Medical Equipment industry average of 7.9%.

See 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'd like, you can check out the forecasts from the analysts covering Kossan Rubber Industries Bhd for free.

The Trend Of ROCE

When we looked at the ROCE trend at Kossan Rubber Industries Bhd, we didn't gain much confidence. To be more specific, ROCE has fallen from 18% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. 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.

On a side note, Kossan Rubber Industries Bhd has done well to pay down its current liabilities to 5.5% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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.

What We Can Learn From Kossan Rubber Industries Bhd's ROCE

To conclude, we've found that Kossan Rubber Industries Bhd is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 37% in the last five years to shareholders, you could argue that they're aware of these lackluster trends. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

If you want to continue researching Kossan Rubber Industries Bhd, you might be interested to know about the 2 warning signs that our analysis has discovered.

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.

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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.