What are the early trends we should look for to identify a stock that could multiply in value over the long term? Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it’s a company with a great business model and plenty of profitable reinvestment opportunities. Although, when we looked at Favelle Favco Berhad (KLSE:FAVCO), it didn’t seem to tick all of these boxes.
What Is Return On Capital Employed (ROCE)?
For those who don’t know, ROCE is a measure of a company’s yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Favelle Favco Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.11 = RM98m ÷ (RM1.5b – RM581m) (Based on the trailing twelve months to December 2023).
Therefore, Favelle Favco Berhad has an ROCE of 11%. That’s a relatively normal return on capital, and it’s around the 9.4% generated by the Machinery industry.
See our latest analysis for Favelle Favco Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Favelle Favco Berhad’s ROCE against it’s prior returns. If you’re interested in investigating Favelle Favco Berhad’s past further, check out this free graph covering Favelle Favco Berhad’s past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
Over the past five years, Favelle Favco Berhad’s ROCE and capital employed have both remained mostly flat. It’s not uncommon to see this when looking at a mature and stable business that isn’t re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn’t expect Favelle Favco Berhad to be a multi-bagger going forward.
The Bottom Line
We can conclude that in regards to Favelle Favco Berhad’s returns on capital employed and the trends, there isn’t much change to report on. Unsurprisingly, the stock has only gained 31% over the last five years, which potentially indicates that investors are accounting for this going forward. So if you’re looking for a multi-bagger, the underlying trends indicate you may have better chances elsewhere.
If you’d like to know more about Favelle Favco Berhad, we’ve spotted 2 warning signs, and 1 of them makes us a bit uncomfortable.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.
