Returns Are Gaining Momentum At Batu Kawan Berhad (KLSE:BKAWAN)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. Speaking of which, we noticed some great changes in Batu Kawan Berhad's (KLSE:BKAWAN) returns on capital, so let's have a look.

Understanding 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. The formula for this calculation on Batu Kawan Berhad is:

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

0.13 = RM3.3b ÷ (RM32b - RM6.3b) (Based on the trailing twelve months to December 2022).

Therefore, Batu Kawan Berhad has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Chemicals industry average of 7.5% it's much better.

See our latest analysis for Batu Kawan Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Batu Kawan Berhad's ROCE against it's prior returns. If you're interested in investigating Batu Kawan Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We like the trends that we're seeing from Batu Kawan Berhad. Over the last five years, returns on capital employed have risen substantially to 13%. Basically the business is earning more per dollar of capital invested and in addition to that, 46% more capital is being employed now too. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, a combination that's common among multi-baggers.

The Key Takeaway

A company that is growing its returns on capital and can consistently reinvest in itself is a highly sought after trait, and that's what Batu Kawan Berhad has. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 44% return over the last five years. 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.

On a separate note, we've found 3 warning signs for Batu Kawan Berhad you'll probably want to know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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.