What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after briefly looking over the numbers, we don't think Kimlun Corporation Berhad (KLSE:KIMLUN) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What Is Return On Capital Employed (ROCE)?

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 Kimlun Corporation Berhad:

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

0.026 = RM28m ÷ (RM1.9b - RM789m) (Based on the trailing twelve months to June 2024).

Therefore, Kimlun Corporation Berhad has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Construction industry average of 9.4%.

View our latest analysis for Kimlun Corporation Berhad

In the above chart we have measured Kimlun Corporation 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 analyst report for Kimlun Corporation Berhad .

What Does the ROCE Trend For Kimlun Corporation Berhad Tell Us?

In terms of Kimlun Corporation Berhad's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 2.6% from 12% five years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

On a separate but related note, it's important to know that Kimlun Corporation Berhad has a current liabilities to total assets ratio of 43%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line On Kimlun Corporation Berhad's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Kimlun Corporation Berhad is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 23% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

On a final note, we found 2 warning signs for Kimlun Corporation Berhad (1 is a bit concerning) you should be aware of.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.