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Return on Capital and Stock Return kcchongnz

Publish date: Tue, 18 Feb 2020, 06:30 PM
This a kcchongnz blog

In my previous articles, “Quality Investing” below, I have brought to your attention the extra-ordinary return of a random portfolio of quality stocks.


The portfolio returned 331% over 10 years as on 17th February 2020, more than 10 folds of the return of the broad index of 31% during the same period. The compounded annual return, CAR, including dividend yield of the portfolio was a whopping 16.5%, 4 times the CAR of 5% of the broad index. RM100,000 invested in this portfolio of stocks with equal weighting multiplied to RM462,000 over the period, 3 times more than the RM163,000 of a portfolio invested in the 30 component stocks in Bursa during the same period. The stocks in the random quality portfolio were Petronas Dagangan, Nestle, Public Bank, Dutch Lady, Heineken, LPI, Aeon Credit, and Carlsberg.

I have discussed at length the qualitative attributes of high-quality companies in the link above.

In the following article, “Quantitative Metric No. 1: Return on Capital”, I suggested that the most important quantitative measure for quality is the return on capital, ROC.


I have also discussed in detail what ROCs are and how they are computed in the above article. I stressed that a quality company must earn a ROC higher than its cost of capital and hence should generally be a double-digit figure. That is a no-brainer.

Here, let us examine the ROCs of each individual stock in the random portfolio above which produced extra-ordinary return over the last 10 years and see if it is true that they have high ROC.


Quality investing focuses on a company’s ability to invest capital at high rates of return: post-tax levels of high-teens (and higher) are possible.”


First, we look at the share price movement and ROC of Carlsberg Brewery Malaysia, a producer of short-live consumer products with a well-known brand name.

Figure 1: Share price and ROC of Carlsberg

Carlsberg’s share price rose from RM4.62 ten years ago to RM36.20 at the close on 17th February 2020, for a gain of 684%, or a CAR of 23%! Its ROC has always been in double-digit figure, rising from 30% to 133% in 2019 as shown in Figure 1 above. Ignoring the valuation expansion part of it, that has proven the power of high and rising ROC in stock return.

Carlsberg competitor, Heineken Malaysia, performed very well too with 329% gain over the ten years period, or a good CAR of 15.7% as shown in Figure 2 below.

Figure 2: Share price and ROC of Heineken Malaysia

We can see from the chart that Heim has consistent high ROC of more than 60%, rising to 80% in 2018. Its share price rose in tandem from RM6.90 to close ten years at RM29.58 on 17th February 2020.

Next, we have Nestle, another high-quality company with high ROC, rising from 30% in year 2011 to 134% in 2019. Its share price improved the same magnitude as Heim, rising from RM33.76 ten years ago to RM145 at the close on 17th February 2020 as shown in Figure 3 below.

Figure 3: Share price and ROC of Nestle Malaysia

For the rest of the companies in the random quality portfolio, all their share prices have also way outperformed the broad KLCI as shown in Figures 4 to 8 below and Table 1 in the Appendix.

For Financial Institutions and credit companies such as Aeon Credit, Public bank and LPI Capital, we use ROE as a measure of its return of capital as ROC is not an appropriate measure for them.

Figure 4: Share price and ROC of Aeon Credit

Aeon Credit also has high ROE above 20% all these years. Its share price has also performed well with a CAR of 13.9% over the last ten years. In the most recent year in 2019, ROE has dropped from the peak of 35% in 2013 to 20%, but still way above its cost of capital. With the drop of ROE, its share price has been stagnant for the last few years.

Figure 5: Share price and ROC of Dutch Lady

Dutch Lady has extremely high ROC of more than 100% for the last few years, propelling its share price from RM11.80 ten years ago to close at RM42.50 on 17th February 2020, for a gain of 260%.

Figure 6: Share price and ROC of LPI Capital

LPI has reasonably good ROE of 12% or more over the last 10 years. This ROE is considerably higher than the required return of equity shareholders for a stable company like LPI, and Public Bank. Its share price also has a high CAR of 12.2%, way outperformed that of the broad market.

Figure 7: Share price and ROC of Public Bank Berhad

ROE of public Bank has been deteriorating over the last few years, and hence a slow down in the rise of its share price. Nevertheless, its price has a respectable CAR of 10%. Its ROE has been more than 12%, much higher than the required return of equity shareholders.

Petronas Dagangan, although having the lowest cumulative return of among the 8 stocks in the quality portfolio of 160%, also outperformed the broad index by a wide margin. Its ROC is generally above 10% and above its cost of capital.

Figure 8: Share price and ROC of Petronas Dagangan


In general, businesses with high ROC have seen extra-ordinary return of their share prices over the long-term.  The share price performance of the random portfolio of quality stocks with high and double-digit ROC has shown that quite conclusively. It is hence a viable strategy to invest in quality companies with high ROC.

Please note that ROC is just one of the quantitative measures of quality, abeith the most imprtant one in my opinion. There are other quantitative measures of quality which we will deliberate later.

However, it must be reminded that it doesn’t mean investing in high quality companies always result in extra-ordinary return. It depends very much also on the price one pays for them. We will deliberate this in the subsequent articles.

This article is about fundamental investing, by treating investing in stocks as akin to investing in a business. If you are interested to know more about fundamental investing, which I believe strongly is the right-path of investing. There are resources in the internet including many good books on learning about the fundamentals of investing. Here is one,

This book is on sale in the major bookshops such as MPH and Popular. You may also contact me to purchase a copy if you wish at the following email address.


This may end up as your best investment.

Happy investing.

KC Chong




Table 1: 10-years Stock Return of a Quality Portfolio



2 people like this. Showing 1 of 1 comments

enigmatic ¯\_(ツ)_/¯

When the price has increased so much, I think the stock capital appreciation rate will not be as great as the previous 10 years.

But I believe that high ROC companies are much much better than companies with mediocre ROC and certainly more worthwhile to invest in.

2020-02-22 12:04

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