Returns On Capital At Batu Kawan Berhad (KLSE:BKAWAN) Have Stalled

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. However, after briefly looking over the numbers, we don't think Batu Kawan Berhad (KLSE:BKAWAN) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. Analysts use this formula to calculate it for Batu Kawan Berhad:

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

0.087 = RM2.3b ÷ (RM32b - RM5.0b) (Based on the trailing twelve months to June 2023).

Thus, Batu Kawan Berhad has an ROCE of 8.7%. On its own, that's a low figure but it's around the 7.9% average generated by the Chemicals industry.

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

There are better returns on capital out there than what we're seeing at Batu Kawan Berhad. The company has consistently earned 8.7% for the last five years, and the capital employed within the business has risen 54% in that time. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line

Long story short, while Batu Kawan Berhad has been reinvesting its capital, the returns that it's generating haven't increased. Since the stock has gained an impressive 45% over the last five years, investors must think there's better things to come. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.

On a final note, we've found 2 warning signs for Batu Kawan Berhad that we think you should be aware of.

While Batu Kawan 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.