Here's What To Make Of YKGI Holdings Berhad's (KLSE:YKGI) Decelerating Rates Of Return

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. 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. In light of that, when we looked at YKGI Holdings Berhad (KLSE:YKGI) and its ROCE trend, we weren't exactly thrilled.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on YKGI Holdings Berhad is:

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

0.049 = RM5.1m ÷ (RM190m - RM87m) (Based on the trailing twelve months to March 2021).

So, YKGI Holdings Berhad has an ROCE of 4.9%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 6.6%.

Check out our latest analysis for YKGI Holdings Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for YKGI Holdings Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of YKGI Holdings Berhad, check out these free graphs here.

What Does the ROCE Trend For YKGI Holdings Berhad Tell Us?

Over the past five years, YKGI Holdings Berhad's ROCE has remained relatively flat while the business is using 58% less capital than before. When a company effectively decreases its assets base, it's not usually a sign to be optimistic on that company. Not only that, but the low returns on this capital mentioned earlier would leave most investors unimpressed.

On a separate but related note, it's important to know that YKGI Holdings Berhad has a current liabilities to total assets ratio of 46%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Key Takeaway

In summary, YKGI Holdings Berhad isn't reinvesting funds back into the business and returns aren't growing. And investors may be recognizing these trends since the stock has only returned a total of 18% to shareholders over the last five years. So if you're looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.

YKGI Holdings Berhad does have some risks, we noticed 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should 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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