KESM Industries Berhad (KLSE:KESM) Has More To Do To Multiply In Value Going Forward

By
Simply Wall St
Published
May 30, 2021
KLSE:KESM
Source: Shutterstock

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base 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. That's why when we briefly looked at KESM Industries Berhad's (KLSE:KESM) ROCE trend, we were pretty happy with what we saw.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for KESM Industries Berhad:

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

0.14 = RM52m ÷ (RM414m - RM39m) (Based on the trailing twelve months to April 2021).

Therefore, KESM Industries Berhad has an ROCE of 14%. That's a relatively normal return on capital, and it's around the 15% generated by the Semiconductor industry.

View our latest analysis for KESM Industries Berhad

roce
KLSE:KESM Return on Capital Employed May 31st 2021

In the above chart we have measured KESM Industries Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for KESM Industries Berhad.

What Can We Tell From KESM Industries Berhad's ROCE Trend?

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 14% for the last five years, and the capital employed within the business has risen 25% in that time. 14% is a pretty standard return, and it provides some comfort knowing that KESM Industries Berhad has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Bottom Line On KESM Industries Berhad's ROCE

To sum it up, KESM Industries Berhad has simply been reinvesting capital steadily, at those decent rates of return. And long term investors would be thrilled with the 154% return they've received over the last five years. So even though the stock might be more "expensive" than it was before, we think the strong fundamentals warrant this stock for further research.

If you want to continue researching KESM Industries Berhad, you might be interested to know about the 2 warning signs that our analysis has discovered.

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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