These Trends Paint A Bright Future For Kossan Rubber Industries Bhd (KLSE:KOSSAN)

There are a few key trends to look for if we want to identify the next multi-bagger. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. And in light of that, the trends we're seeing at Kossan Rubber Industries Bhd's (KLSE:KOSSAN) look very promising so lets take a look.

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 Kossan Rubber Industries Bhd is:

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

0.34 = RM751m ÷ (RM3.2b - RM1.0b) (Based on the trailing twelve months to September 2020).

Thus, Kossan Rubber Industries Bhd has an ROCE of 34%. In absolute terms that's a very respectable return and compared to the Medical Equipment industry average of 39% it's pretty much on par.

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'd like to see what analysts are forecasting going forward, you should check out our free report for Kossan Rubber Industries Bhd.

The Trend Of ROCE

Investors would be pleased with what's happening at Kossan Rubber Industries Bhd. The numbers show that in the last five years, the returns generated on capital employed have grown considerably to 34%. Basically the business is earning more per dollar of capital invested and in addition to that, 95% more capital is being employed now too. So we're very much inspired by what we're seeing at Kossan Rubber Industries Bhd thanks to its ability to profitably reinvest capital.

On a side note, we noticed that the improvement in ROCE appears to be partly fueled by an increase in current liabilities. Effectively this means that suppliers or short-term creditors are now funding 31% of the business, which is more than it was five years ago. It's worth keeping an eye on this because as the percentage of current liabilities to total assets increases, some aspects of risk also increase.

The Bottom Line

In summary, it's great to see that Kossan Rubber Industries Bhd can compound returns by consistently reinvesting capital at increasing rates of return, because these are some of the key ingredients of those highly sought after multi-baggers. Since the stock has returned a staggering 122% to shareholders over the last five years, it looks like investors are recognizing these changes. So given the stock has proven it has promising trends, it's worth researching the company further to see if these trends are likely to persist.

Kossan Rubber Industries Bhd does have some risks though, and we've spotted 1 warning sign for Kossan Rubber Industries Bhd that you might be interested in.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

If you decide to trade Kossan Rubber Industries Bhd, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.