Kim Hin Joo (Malaysia) Berhad (KLSE:KHJB) Will Will Want To Turn Around Its Return Trends

What trends should we look for it we want to identify stocks that can multiply in value over the long term? 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. However, after investigating Kim Hin Joo (Malaysia) Berhad (KLSE:KHJB), 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 Kim Hin Joo (Malaysia) Berhad, this is the formula:

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

0.091 = RM8.6m ÷ (RM110m - RM16m) (Based on the trailing twelve months to December 2020).

Thus, Kim Hin Joo (Malaysia) Berhad has an ROCE of 9.1%. On its own that's a low return, but compared to the average of 7.2% generated by the Specialty Retail industry, it's much better.

View our latest analysis for Kim Hin Joo (Malaysia) Berhad

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

What Can We Tell From Kim Hin Joo (Malaysia) Berhad's ROCE Trend?

When we looked at the ROCE trend at Kim Hin Joo (Malaysia) Berhad, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.1% from 24% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Kim Hin Joo (Malaysia) Berhad's ROCE

We're a bit apprehensive about Kim Hin Joo (Malaysia) Berhad because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Yet despite these concerning fundamentals, the stock has performed strongly with a 40% return over the last year, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

One more thing: We've identified 3 warning signs with Kim Hin Joo (Malaysia) Berhad (at least 1 which can't be ignored) , and understanding these would certainly be useful.

While Kim Hin Joo (Malaysia) Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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