To find a multi-bagger stock, what are the underlying trends we should look for in a business? In a perfect world, we’d like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. 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 investigating Kobay Technology Bhd (KLSE:KOBAY), we don’t think it’s current trends fit the mold of a multi-bagger.
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. The formula for this calculation on Kobay Technology Bhd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.045 = RM21m ÷ (RM605m – RM138m) (Based on the trailing twelve months to June 2024).
Thus, Kobay Technology Bhd has an ROCE of 4.5%. In absolute terms, that’s a low return and it also under-performs the Machinery industry average of 7.9%.
See our latest analysis for Kobay Technology Bhd
roce
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 Kobay Technology Bhd has performed in the past in other metrics, you can view this free graph of Kobay Technology Bhd’s past earnings, revenue and cash flow.
On the surface, the trend of ROCE at Kobay Technology Bhd doesn’t inspire confidence. Around five years ago the returns on capital were 11%, but since then they’ve fallen to 4.5%. Meanwhile, the business is utilizing more capital but this hasn’t moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It’s worth keeping an eye on the company’s earnings from here on to see if these investments do end up contributing to the bottom line.
To conclude, we’ve found that Kobay Technology Bhd is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 162% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn’t high.
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