Our Take On The Returns On Capital At New Hoong Fatt Holdings Berhad (KLSE:NHFATT)

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at New Hoong Fatt Holdings Berhad (KLSE:NHFATT) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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. The formula for this calculation on New Hoong Fatt Holdings Berhad is:

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

0.03 = RM15m ÷ (RM557m - RM48m) (Based on the trailing twelve months to December 2020).

Therefore, New Hoong Fatt Holdings Berhad has an ROCE of 3.0%. In absolute terms, that's a low return and it also under-performs the Auto Components industry average of 6.4%.

View our latest analysis for New Hoong Fatt Holdings 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 want to delve into the historical earnings, revenue and cash flow of New Hoong Fatt Holdings Berhad, check out these free graphs here.

What Does the ROCE Trend For New Hoong Fatt Holdings Berhad Tell Us?

In terms of New Hoong Fatt Holdings Berhad's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 7.8%, but since then they've fallen to 3.0%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

In Conclusion...

From the above analysis, we find it rather worrisome that returns on capital and sales for New Hoong Fatt Holdings Berhad have fallen, meanwhile the business is employing more capital than it was five years ago. In spite of that, the stock has delivered a 6.2% return to shareholders who held over 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.

New Hoong Fatt Holdings Berhad does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is potentially serious...

While New Hoong Fatt Holdings 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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