Here's What's Concerning About Fibon Berhad's (KLSE:FIBON) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. However, after investigating Fibon Berhad (KLSE:FIBON), we don't think it's current trends fit the mold of a multi-bagger.

Understanding 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. Analysts use this formula to calculate it for Fibon Berhad:

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

0.026 = RM1.3m ÷ (RM53m - RM1.2m) (Based on the trailing twelve months to November 2020).

Therefore, Fibon Berhad has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Electrical industry average of 10%.

Check out our latest analysis for Fibon Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Fibon Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Fibon Berhad, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Fibon Berhad doesn't inspire confidence. Over the last five years, returns on capital have decreased to 2.6% from 7.7% 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.

Our Take On Fibon Berhad's ROCE

In summary, we're somewhat concerned by Fibon Berhad's diminishing returns on increasing amounts of capital. Investors haven't taken kindly to these developments, since the stock has declined 19% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing: We've identified 4 warning signs with Fibon Berhad (at least 2 which don't sit too well with us) , and understanding these would certainly be useful.

While Fibon 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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