Investors Will Want YKGI Holdings Berhad's (KLSE:YKGI) Growth In ROCE To Persist

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. So on that note, YKGI Holdings Berhad (KLSE:YKGI) looks quite promising in regards to its trends of return on capital.

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. Analysts use this formula to calculate it for YKGI Holdings Berhad:

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

0.10 = RM11m ÷ (RM204m - RM97m) (Based on the trailing twelve months to June 2021).

Therefore, YKGI Holdings Berhad has an ROCE of 10%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Metals and Mining industry average of 12%.

View 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?

You'd find it hard not to be impressed with the ROCE trend at YKGI Holdings Berhad. The data shows that returns on capital have increased by 142% over the trailing five years. That's not bad because this tells for every dollar invested (capital employed), the company is increasing the amount earned from that dollar. Speaking of capital employed, the company is actually utilizing 57% less than it was five years ago, which can be indicative of a business that's improving its efficiency. If this trend continues, the business might be getting more efficient but it's shrinking in terms of total assets.

Another thing to note, YKGI Holdings Berhad has a high ratio of current liabilities to total assets of 48%. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From YKGI Holdings Berhad's ROCE

In the end, YKGI Holdings Berhad has proven it's capital allocation skills are good with those higher returns from less amount of capital. And since the stock has fallen 53% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

YKGI Holdings Berhad does have some risks, we noticed 4 warning signs (and 1 which shouldn't be ignored) we think you should know about.

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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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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