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

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Fajarbaru Builder Group Bhd (KLSE:FAJAR), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

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. 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)

0.051 = RM23m ÷ (RM609m - RM155m) (Based on the trailing twelve months to March 2024).

So, Fajarbaru Builder Group Bhd has an ROCE of 5.1%. Ultimately, that's a low return and it under-performs the Construction industry average of 6.6%.

See our latest analysis for Fajarbaru Builder Group Bhd

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'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 Fajarbaru Builder Group Bhd's past earnings, revenue and cash flow.

What The Trend Of ROCE Can Tell Us

Unfortunately, the trend isn't great with ROCE falling from 10% five years ago, while capital employed has grown 39%. However, some of the increase in capital employed could be attributed to the recent capital raising that's been completed prior to their latest reporting period, so keep that in mind when looking at the ROCE decrease. It's unlikely that all of the funds raised have been put to work yet, so as a consequence Fajarbaru Builder Group Bhd might not have received a full period of earnings contribution from it.

The Key Takeaway

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Fajarbaru Builder Group Bhd. And the stock has done incredibly well with a 128% return over the last five years, so long term investors are no doubt ecstatic with that result. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

If you'd like to know more about Fajarbaru Builder Group Bhd, we've spotted 2 warning signs, and 1 of them makes us a bit uncomfortable.

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. 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.