Returns At Koh Brothers Group (SGX:K75) Are On The Way Up

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. With that in mind, we've noticed some promising trends at Koh Brothers Group (SGX:K75) so let's look a bit deeper.

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 Koh Brothers Group:

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

0.0037 = S$1.8m ÷ (S$800m - S$323m) (Based on the trailing twelve months to December 2022).

Therefore, Koh Brothers Group has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 3.9%.

Check out our latest analysis for Koh Brothers Group

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 Koh Brothers Group has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

We're delighted to see that Koh Brothers Group is reaping rewards from its investments and has now broken into profitability. The company now earns 0.4% on its capital, because five years ago it was incurring losses. While returns have increased, the amount of capital employed by Koh Brothers Group has remained flat over the period. So while we're happy that the business is more efficient, just keep in mind that could mean that going forward the business is lacking areas to invest internally for growth. Because in the end, a business can only get so efficient.

On a separate but related note, it's important to know that Koh Brothers Group has a current liabilities to total assets ratio of 40%, 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

To sum it up, Koh Brothers Group is collecting higher returns from the same amount of capital, and that's impressive. And since the stock has fallen 51% over the last five years, there might be an opportunity here. So researching this company further and determining whether or not these trends will continue seems justified.

Koh Brothers Group does come with some risks though, we found 5 warning signs in our investment analysis, and 2 of those are significant...

While Koh Brothers Group 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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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