The Returns At Kim Hin Joo (Malaysia) Berhad (KLSE:KHJB) Provide Us With Signs Of What's To Come

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing 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.

Return On Capital Employed (ROCE): What is it?

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. 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)

0.11 = RM9.8m ÷ (RM107m - RM15m) (Based on the trailing twelve months to September 2020).

So, Kim Hin Joo (Malaysia) Berhad has an ROCE of 11%. That's a relatively normal return on capital, and it's around the 10% generated by the Specialty Retail industry.

Check out our latest analysis for Kim Hin Joo (Malaysia) Berhad

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Kim Hin Joo (Malaysia) Berhad, check out these free graphs here.

What Does the ROCE Trend For Kim Hin Joo (Malaysia) Berhad Tell Us?

When we looked at the ROCE trend at Kim Hin Joo (Malaysia) Berhad, we didn't gain much confidence. Over the last four years, returns on capital have decreased to 11% from 26% four years ago. And considering revenue has dropped while employing more capital, we'd be cautious. 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 Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for Kim Hin Joo (Malaysia) Berhad have fallen, meanwhile the business is employing more capital than it was four years ago. And, the stock has remained flat over the last year, so investors don't seem too impressed either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 4 warning signs for Kim Hin Joo (Malaysia) Berhad (of which 1 is a bit unpleasant!) that you should know about.

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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