Aimflex Berhad's (KLSE:AIMFLEX) Returns On Capital Not Reflecting Well On The Business

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. 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 Aimflex Berhad (KLSE:AIMFLEX) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Understanding Return On Capital Employed (ROCE)

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 Aimflex Berhad is:

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

0.13 = RM9.2m ÷ (RM84m - RM12m) (Based on the trailing twelve months to December 2020).

So, Aimflex Berhad has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 10% it's much better.

View our latest analysis for Aimflex Berhad

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'd like to look at how Aimflex Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

In terms of Aimflex Berhad's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 13% from 21% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a related note, Aimflex Berhad has decreased its current liabilities to 14% of total assets. That could partly explain why the ROCE has dropped. 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.

The Bottom Line On Aimflex Berhad's ROCE

We're a bit apprehensive about Aimflex Berhad because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Since the stock has skyrocketed 134% over the last year, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you'd like to know about the risks facing Aimflex Berhad, we've discovered 2 warning signs that you should be aware of.

While Aimflex 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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