Aimflex Berhad (KLSE:AIMFLEX) Might Be Having Difficulty Using Its Capital Effectively

March 08, 2022
  •  Updated
June 14, 2022
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To find a multi-bagger stock, what are the underlying trends we should look for in a business? 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. However, after briefly looking over the numbers, we don't think Aimflex Berhad (KLSE:AIMFLEX) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Aimflex Berhad is:

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

0.062 = RM4.8m ÷ (RM99m - RM21m) (Based on the trailing twelve months to December 2021).

Thus, Aimflex Berhad has an ROCE of 6.2%. Ultimately, that's a low return and it under-performs the Machinery industry average of 12%.

See our latest analysis for Aimflex Berhad

KLSE:AIMFLEX Return on Capital Employed March 8th 2022

Historical performance is a great place to start when researching a stock so above you can see the gauge for Aimflex Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Aimflex Berhad, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Aimflex Berhad doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.2% from 22% five years ago. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

On a related note, Aimflex Berhad has decreased its current liabilities to 21% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

What We Can Learn From Aimflex Berhad's ROCE

While returns have fallen for Aimflex Berhad in recent times, we're encouraged to see that sales are growing and that the business is reinvesting in its operations. These growth trends haven't led to growth returns though, since the stock has fallen 45% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

One final note, you should learn about the 7 warning signs we've spotted with Aimflex Berhad (including 2 which don't sit too well with us) .

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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Find out whether Aimflex Berhad is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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