27-05-2025
LTKM Berhad's (KLSE:LTKM) Returns On Capital Not Reflecting Well On The Business
What underlying fundamental trends can indicate that a company might be in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within LTKM Berhad (KLSE:LTKM), we weren't too hopeful.
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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 LTKM Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.063 = RM22m ÷ (RM428m - RM77m) (Based on the trailing twelve months to December 2024).
Therefore, LTKM Berhad has an ROCE of 6.3%. In absolute terms, that's a low return and it also under-performs the Food industry average of 9.2%.
See our latest analysis for LTKM Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for LTKM Berhad's ROCE against it's prior returns. If you're interested in investigating LTKM Berhad's past further, check out this free graph covering LTKM Berhad's past earnings, revenue and cash flow.
We are a bit worried about the trend of returns on capital at LTKM Berhad. About five years ago, returns on capital were 13%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on LTKM Berhad becoming one if things continue as they have.
In summary, it's unfortunate that LTKM Berhad is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 24% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.
LTKM Berhad does have some risks though, and we've spotted 2 warning signs for LTKM Berhad that you might be interested in.
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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