Investors Could Be Concerned With Aimflex Berhad's (KLSE:AIMFLEX) Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. 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.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Aimflex Berhad:

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

0.078 = RM5.7m ÷ (RM81m - RM8.1m) (Based on the trailing twelve months to March 2021).

Therefore, Aimflex Berhad has an ROCE of 7.8%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 10%.

See our latest analysis for Aimflex 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 Aimflex Berhad, check out these free graphs here.

What Does the ROCE Trend For Aimflex Berhad 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 7.8% from 21% 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 may take some time before the company starts to see any change in earnings from these investments.

On a related note, Aimflex Berhad has decreased its current liabilities to 10.0% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Aimflex Berhad's ROCE

To conclude, we've found that Aimflex Berhad is reinvesting in the business, but returns have been falling. Since the stock has declined 14% over the last year, investors may not be too optimistic on this trend improving either. Therefore based on the analysis done in this article, we don't think Aimflex Berhad has the makings of a multi-bagger.

One more thing: We've identified 3 warning signs with Aimflex Berhad (at least 1 which shouldn't be ignored) , and understanding them would certainly be useful.

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. 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.
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