Stock Analysis

Returns On Capital Signal Difficult Times Ahead For Fajarbaru Builder Group Bhd (KLSE:FAJAR)

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If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. Having said that, after a brief look, Fajarbaru Builder Group Bhd (KLSE:FAJAR) we aren't filled with optimism, but let's investigate further.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Fajarbaru Builder Group Bhd, this is the formula:

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

0.016 = RM6.8m ÷ (RM561m - RM148m) (Based on the trailing twelve months to June 2022).

So, Fajarbaru Builder Group Bhd has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Construction industry average of 5.1%.

See our latest analysis for Fajarbaru Builder Group Bhd

KLSE:FAJAR Return on Capital Employed October 4th 2022

Historical performance is a great place to start when researching a stock so above you can see the gauge for Fajarbaru Builder Group Bhd's ROCE against it's prior returns. If you'd like to look at how Fajarbaru Builder Group Bhd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Fajarbaru Builder Group Bhd Tell Us?

In terms of Fajarbaru Builder Group Bhd's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 30% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Fajarbaru Builder Group Bhd to turn into a multi-bagger.

What We Can Learn From Fajarbaru Builder Group Bhd's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. It should come as no surprise then that the stock has fallen 29% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing: We've identified 5 warning signs with Fajarbaru Builder Group Bhd (at least 2 which are a bit concerning) , and understanding these would certainly be useful.

While Fajarbaru Builder Group Bhd may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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Find out whether Fajarbaru Builder Group Bhd 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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Fajarbaru Builder Group Bhd

Fajarbaru Builder Group Bhd., an investment holding company, engages in the civil, infrastructure, and building construction works in Malaysia.

The Snowflake is a visual investment summary with the score of each axis being calculated by 6 checks in 5 areas.

Analysis AreaScore (0-6)
Future Growth0
Past Performance1
Financial Health6

Read more about these checks in the individual report sections or in our analysis model.

Flawless balance sheet second-rate dividend payer.