What Do The Returns On Capital At Batu Kawan Berhad (KLSE:BKAWAN) Tell Us?

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. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Batu Kawan Berhad (KLSE:BKAWAN), we don't think it's current trends fit the mold of a multi-bagger.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Batu Kawan Berhad, this is the formula:

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

0.086 = RM1.7b ÷ (RM24b - RM3.7b) (Based on the trailing twelve months to December 2020).

So, Batu Kawan Berhad has an ROCE of 8.6%. In absolute terms, that's a low return, but it's much better than the Chemicals industry average of 7.2%.

View 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.

So How Is Batu Kawan Berhad's ROCE Trending?

On the surface, the trend of ROCE at Batu Kawan Berhad doesn't inspire confidence. To be more specific, ROCE has fallen from 13% over the last five years. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

The Bottom Line

In summary, Batu Kawan Berhad is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Unsurprisingly, the stock has only gained 14% over the last five years, which potentially indicates that investors are accounting for this going forward. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

One final note, you should learn about the 3 warning signs we've spotted with Batu Kawan Berhad (including 1 which is concerning) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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