K. Seng Seng Corporation Berhad (KLSE:KSSC) Might Be Having Difficulty Using Its Capital Effectively

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. However, after briefly looking over the numbers, we don't think K. Seng Seng Corporation Berhad (KLSE:KSSC) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on K. Seng Seng Corporation Berhad is:

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

0.03 = RM3.6m ÷ (RM219m - RM97m) (Based on the trailing twelve months to March 2023).

Therefore, K. Seng Seng Corporation Berhad has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 9.0%.

View our latest analysis for K. Seng Seng Corporation 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'd like to look at how K. Seng Seng Corporation Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From K. Seng Seng Corporation Berhad's ROCE Trend?

When we looked at the ROCE trend at K. Seng Seng Corporation Berhad, we didn't gain much confidence. To be more specific, ROCE has fallen from 8.9% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 44%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 3.0%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

In Conclusion...

In summary, despite lower returns in the short term, we're encouraged to see that K. Seng Seng Corporation Berhad is reinvesting for growth and has higher sales as a result. And long term investors must be optimistic going forward because the stock has returned a huge 244% to shareholders in the last five years. So should these growth trends continue, we'd be optimistic on the stock going forward.

K. Seng Seng Corporation Berhad does have some risks, we noticed 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

While K. Seng Seng Corporation 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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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.

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