Capital Allocation Trends At KPJ Healthcare Berhad (KLSE:KPJ) Aren't Ideal

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

Return On Capital Employed (ROCE): What is it?

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 KPJ Healthcare Berhad is:

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

0.051 = RM252m ÷ (RM6.3b - RM1.4b) (Based on the trailing twelve months to March 2021).

Thus, KPJ Healthcare Berhad has an ROCE of 5.1%. Ultimately, that's a low return and it under-performs the Healthcare industry average of 9.7%.

View our latest analysis for KPJ Healthcare Berhad

In the above chart we have measured KPJ Healthcare Berhad'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 report on analyst forecasts for the company.

The Trend Of ROCE

When we looked at the ROCE trend at KPJ Healthcare Berhad, we didn't gain much confidence. To be more specific, ROCE has fallen from 8.0% over the last five years. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It may take some time before the company starts to see any change in earnings from these investments.

The Key Takeaway

To conclude, we've found that KPJ Healthcare Berhad is reinvesting in the business, but returns have been falling. And with the stock having returned a mere 12% 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.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 2 warning signs for KPJ Healthcare Berhad (of which 1 can't be ignored!) that you should know about.

While KPJ Healthcare Berhad 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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