Why The 27% Return On Capital At Kossan Rubber Industries Bhd (KLSE:KOSSAN) Should Have Your Attention

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. With that in mind, the ROCE of Kossan Rubber Industries Bhd (KLSE:KOSSAN) looks great, so lets see what the trend can tell us.

What Is 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. 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)

0.27 = RM1.1b ÷ (RM4.5b - RM443m) (Based on the trailing twelve months to June 2022).

So, Kossan Rubber Industries Bhd has an ROCE of 27%. On its own, that's a very good return and it's on par with the returns earned by companies in a similar industry.

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

How Are Returns Trending?

Kossan Rubber Industries Bhd is displaying some positive trends. The data shows that returns on capital have increased substantially over the last five years to 27%. The company is effectively making more money per dollar of capital used, and it's worth noting that the amount of capital has increased too, by 200%. The increasing returns on a growing amount of capital is common amongst multi-baggers and that's why we're impressed.

The Bottom Line

To sum it up, Kossan Rubber Industries Bhd has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. Given the stock has declined 15% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

One more thing: We've identified 3 warning signs with Kossan Rubber Industries Bhd (at least 1 which makes us a bit uncomfortable) , and understanding these would certainly be useful.

Kossan Rubber Industries Bhd is not the only stock earning high returns. If you'd like to see more, check out our free list of companies earning high returns on equity with solid fundamentals.

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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.