Some Investors May Be Worried About Fajarbaru Builder Group Bhd's (KLSE:FAJAR) Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at Fajarbaru Builder Group Bhd (KLSE:FAJAR) 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?

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. Analysts use this formula to calculate it for Fajarbaru Builder Group Bhd:

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

0.048 = RM18m ÷ (RM463m - RM98m) (Based on the trailing twelve months to December 2020).

Therefore, Fajarbaru Builder Group Bhd has an ROCE of 4.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 4.8%.

View our latest analysis for Fajarbaru Builder Group Bhd

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 Can We Tell From Fajarbaru Builder Group Bhd's ROCE Trend?

On the surface, the trend of ROCE at Fajarbaru Builder Group Bhd doesn't inspire confidence. Around five years ago the returns on capital were 14%, but since then they've fallen to 4.8%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

On a related note, Fajarbaru Builder Group Bhd has decreased its current liabilities to 21% 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

From the above analysis, we find it rather worrisome that returns on capital and sales for Fajarbaru Builder Group Bhd have fallen, meanwhile the business is employing more capital than it was five years ago. Yet despite these concerning fundamentals, the stock has performed strongly with a 43% return over the last five years, so investors appear very optimistic. 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 Fajarbaru Builder Group Bhd, we've discovered 3 warning signs that you should be aware of.

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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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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