There Are Reasons To Feel Uneasy About ABM Fujiya Berhad's (KLSE:AFUJIYA) Returns On Capital

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at ABM Fujiya Berhad (KLSE:AFUJIYA) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

We've found 21 US stocks that are forecast to pay a dividend yield of over 6% next year. See the full list for free.

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

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. The formula for this calculation on ABM Fujiya Berhad is:

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

0.0028 = RM741k ÷ (RM510m - RM244m) (Based on the trailing twelve months to December 2024).

Thus, ABM Fujiya Berhad has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 11%.

See our latest analysis for ABM Fujiya Berhad

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. 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 ABM Fujiya Berhad's past earnings, revenue and cash flow.

The Trend Of ROCE

On the surface, the trend of ROCE at ABM Fujiya Berhad doesn't inspire confidence. Around five years ago the returns on capital were 4.4%, but since then they've fallen to 0.3%. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 48%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 0.3%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

Our Take On ABM Fujiya Berhad's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that ABM Fujiya Berhad is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 21% over the last five years. So this stock may still be an appealing investment opportunity, if other fundamentals prove to be sound.

One final note, you should learn about the 4 warning signs we've spotted with ABM Fujiya Berhad (including 3 which shouldn't be ignored) .

While ABM Fujiya Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.