Returns On Capital At ABM Fujiya Berhad (KLSE:AFUJIYA) Paint A Concerning Picture

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount 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 ABM Fujiya Berhad (KLSE:AFUJIYA), we weren't too hopeful.

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. Analysts use this formula to calculate it for ABM Fujiya Berhad:

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

0.036 = RM6.2m ÷ (RM278m - RM107m) (Based on the trailing twelve months to March 2021).

Therefore, ABM Fujiya Berhad has an ROCE of 3.6%. On its own that's a low return on capital but it's in line with the industry's average returns of 3.8%.

See our latest analysis for ABM Fujiya Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for ABM Fujiya Berhad's ROCE against it's prior returns. If you'd like to look at how ABM Fujiya Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of ABM Fujiya Berhad's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 4.8% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect ABM Fujiya Berhad to turn into a multi-bagger.

On a side note, ABM Fujiya Berhad's current liabilities have increased over the last five years to 38% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 3.6%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

What We Can Learn From ABM Fujiya Berhad's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. In spite of that, the stock has delivered a 4.3% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One more thing: We've identified 3 warning signs with ABM Fujiya Berhad (at least 2 which are concerning) , and understanding them would certainly be useful.

While ABM Fujiya Berhad isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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.
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