Is There More Growth In Store For CNI Holdings Berhad's (KLSE:CNI) Returns On Capital?

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's 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. So when we looked at CNI Holdings Berhad (KLSE:CNI) and its trend of ROCE, we really liked what we saw.

Understanding 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 CNI Holdings Berhad, this is the formula:

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

0.0049 = RM362k ÷ (RM85m - RM12m) (Based on the trailing twelve months to September 2020).

Therefore, CNI Holdings Berhad has an ROCE of 0.5%. Ultimately, that's a low return and it under-performs the Retail Distributors industry average of 6.8%.

See our latest analysis for CNI Holdings Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for CNI Holdings Berhad's ROCE against it's prior returns. If you'd like to look at how CNI Holdings Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

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

We're delighted to see that CNI Holdings Berhad is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 0.5% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 23%. CNI Holdings Berhad could be selling under-performing assets since the ROCE is improving.

The Key Takeaway

In the end, CNI Holdings Berhad has proven it's capital allocation skills are good with those higher returns from less amount of capital. And a remarkable 166% total return over the last five years tells us that investors are expecting more good things to come in the future. Therefore, we think it would be worth your time to check if these trends are going to continue.

On a separate note, we've found 2 warning signs for CNI Holdings Berhad you'll probably want to 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. 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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