Can Kronologi Asia Berhad (KLSE:KRONO) Continue To Grow Its 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? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount 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. So when we looked at Kronologi Asia Berhad (KLSE:KRONO) and its trend of ROCE, we really liked what we saw.

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. To calculate this metric for Kronologi Asia Berhad, this is the formula:

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

0.038 = RM9.8m ÷ (RM345m - RM87m) (Based on the trailing twelve months to September 2020).

Thus, Kronologi Asia Berhad has an ROCE of 3.8%. In absolute terms, that's a low return and it also under-performs the Software industry average of 12%.

View our latest analysis for Kronologi Asia 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're interested in investigating Kronologi Asia Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Kronologi Asia Berhad's ROCE Trending?

The fact that Kronologi Asia Berhad is now generating some pre-tax profits from its prior investments is very encouraging. About five years ago the company was generating losses but things have turned around because it's now earning 3.8% on its capital. In addition to that, Kronologi Asia Berhad is employing 663% more capital than previously which is expected of a company that's trying to break into profitability. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

One more thing to note, Kronologi Asia Berhad has decreased current liabilities to 25% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. This tells us that Kronologi Asia Berhad has grown its returns without a reliance on increasing their current liabilities, which we're very happy with.

The Bottom Line

In summary, it's great to see that Kronologi Asia Berhad has managed to break into profitability and is continuing to reinvest in its business. And a remarkable 286% total return over the last five years tells us that investors are expecting more good things to come in the future. In light of that, we think it's worth looking further into this stock because if Kronologi Asia Berhad can keep these trends up, it could have a bright future ahead.

Kronologi Asia Berhad does have some risks though, and we've spotted 3 warning signs for Kronologi Asia Berhad that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high 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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