Some Investors May Be Worried About Kim Hin Joo (Malaysia) Berhad's (KLSE:KHJB) 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? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Kim Hin Joo (Malaysia) Berhad (KLSE:KHJB) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Kim Hin Joo (Malaysia) Berhad:

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

0.095 = RM8.9m ÷ (RM111m - RM17m) (Based on the trailing twelve months to March 2021).

Therefore, Kim Hin Joo (Malaysia) Berhad has an ROCE of 9.5%. On its own, that's a low figure but it's around the 9.7% average generated by the Specialty Retail industry.

See 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're interested in investigating Kim Hin Joo (Malaysia) Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Kim Hin Joo (Malaysia) Berhad's ROCE Trending?

In terms of Kim Hin Joo (Malaysia) Berhad's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 9.5% from 25% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line

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. However the stock has delivered a 32% return to shareholders over the last year, so investors might be expecting the trends to turn around. 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 final note, you should learn about the 3 warning signs we've spotted with Kim Hin Joo (Malaysia) Berhad (including 1 which is potentially serious) .

While Kim Hin Joo (Malaysia) Berhad isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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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