If you ignore a company's stock price, what are the underlying trends that indicate a business is past the growth stage? In most cases, you'll see a decline. return Capital Employed (ROCE) and Decreasing Trend amount of capital employed. This trend ultimately means that companies will invest less and receive less return on their investment. Having said that, if you take a quick look, Kawan Food Berhad (KLSE:KAWAN) I'm not optimistic, but let's investigate further.
What is return on capital employed (ROCE)?
In case you aren't familiar, ROCE is a metric that measures how much pre-tax profit (as a percentage) a company earns on the capital invested in its business. The formula for this calculation at Kawan Food Berhad is:
Return on Capital Employed = Earnings before interest and tax (EBIT) ÷ (Total assets – Current liabilities)
0.061 = RM25m ÷ (RM461m – RM53m) (Based on the previous 12 months to December 2023).
therefore, Kawan Food Berhad's ROCE is 6.1%. This is a low number in itself, but the average for the food industry is around 6.9%.
Check out our latest analysis for Kawan Food Berhad.
Above you can see how Kawan Food Berhad's current ROCE compares to its previous return on capital, but history can only tell us so much. If you're interested, take a look at our analyst forecasts. free Kawan Food Berhad analyst report.
What do Kawan Food Berhad's ROCE trends tell us?
When it comes to Kawan Food Berhad's historic ROCE movement, this trend does not inspire confidence. Unfortunately, return on equity is down from 8.3% five years ago. Meanwhile, capital employed in operations remained roughly flat over the period. Revenues are falling and the business is using the same amount of assets, so this may suggest it's a mature business that hasn't grown much over the past five years. Therefore, if things continue as they are, don't hold your breath for Kawan Food Berhad to become a multibagger, as these trends are usually not conducive to the creation of multibaggers.
Important points
All in all, a lower return using the same amount of capital is not exactly a sign of compound interest. Despite the worrying underlying trend, the stock price is actually up 34% over the past five years, so investors may be expecting the trend to reverse. In any case, we're not big fans of the current trend and think better investments may be found elsewhere.
Kawan Food Berhad may be trading at an attractive price in other respects as well. KAWAN's Free Intrinsic Value Estimate Very valuable on our platform.
Kawan Food Berhad isn't the most profitable, but check this out free A list of companies with solid balance sheets and high return on equity.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodologies, and articles are not intended to be financial advice. This is not a recommendation to buy or sell any stock, and does not take into account your objectives or financial situation. We aim to provide long-term, focused analysis based on fundamental data. Note that our analysis may not factor in the latest announcements or qualitative material from price-sensitive companies. Simply Wall St has no position in any stocks mentioned.
