If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So on that note, Lotus KFM Berhad (KLSE:LOTUS) looks quite promising in regards to its trends of return on capital.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for Lotus KFM Berhad, this is the formula:

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

0.024 = RM2.1m ÷ (RM91m - RM5.1m) (Based on the trailing twelve months to June 2023).

So, Lotus KFM Berhad has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Food industry average of 6.8%.

See our latest analysis for Lotus KFM Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Lotus KFM Berhad's ROCE against it's prior returns. If you're interested in investigating Lotus KFM Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Lotus KFM Berhad's ROCE Trending?

The fact that Lotus KFM Berhad is now generating some pre-tax profits from its prior investments is very encouraging. Shareholders would no doubt be pleased with this because the business was loss-making three years ago but is is now generating 2.4% on its capital. In addition to that, Lotus KFM Berhad is employing 30% more capital than previously which is expected of a company that's trying to break into profitability. We like this trend, because it tells us the company has profitable reinvestment opportunities available to it, and if it continues going forward that can lead to a multi-bagger performance.

In another part of our analysis, we noticed that the company's ratio of current liabilities to total assets decreased to 5.7%, which broadly means the business is relying less on its suppliers or short-term creditors to fund its operations. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

The Bottom Line On Lotus KFM Berhad's ROCE

To the delight of most shareholders, Lotus KFM Berhad has now broken into profitability. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.