There Are Reasons To Feel Uneasy About New Hoong Fatt Holdings Berhad's (KLSE:NHFATT) Returns On Capital

There are a few key trends to look for if we want to identify the next multi-bagger. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at New Hoong Fatt Holdings Berhad (KLSE:NHFATT), it didn't seem to tick all of these boxes.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed 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)

0.042 = RM22m ÷ (RM569m - RM53m) (Based on the trailing twelve months to September 2021).

So, New Hoong Fatt Holdings Berhad has an ROCE of 4.2%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 8.1%.

View our latest analysis for New Hoong Fatt Holdings Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for New Hoong Fatt Holdings Berhad's ROCE against it's prior returns. If you're interested in investigating New Hoong Fatt Holdings Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is New Hoong Fatt Holdings Berhad's ROCE Trending?

On the surface, the trend of ROCE at New Hoong Fatt Holdings Berhad doesn't inspire confidence. Over the last five years, returns on capital have decreased to 4.2% from 7.7% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

Our Take On New Hoong Fatt Holdings Berhad's ROCE

Bringing it all together, while we're somewhat encouraged by New Hoong Fatt Holdings Berhad's reinvestment in its own business, we're aware that returns are shrinking. Unsurprisingly then, the total return to shareholders over the last five years has been flat. Therefore based on the analysis done in this article, we don't think New Hoong Fatt Holdings Berhad has the makings of a multi-bagger.

New Hoong Fatt Holdings Berhad does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those can't be ignored...

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.