Flexidynamic Holdings Berhad (KLSE:FLEXI) May Have Issues Allocating Its Capital

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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. Having said that, from a first glance at Flexidynamic Holdings Berhad (KLSE:FLEXI) 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?

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 Flexidynamic Holdings Berhad, this is the formula:

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

0.033 = RM1.6m ÷ (RM79m - RM31m) (Based on the trailing twelve months to June 2024).

Thus, Flexidynamic Holdings Berhad has an ROCE of 3.3%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 7.9%.

See our latest analysis for Flexidynamic Holdings Berhad

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

What Does the ROCE Trend For Flexidynamic Holdings Berhad Tell Us?

We weren't thrilled with the trend because Flexidynamic Holdings Berhad's ROCE has reduced by 87% over the last five years, while the business employed 91% more capital. That being said, Flexidynamic Holdings Berhad raised some capital prior to their latest results being released, so that could partly explain the increase in capital employed. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Flexidynamic Holdings Berhad's earnings and if they change as a result from the capital raise.

What We Can Learn From Flexidynamic Holdings Berhad's ROCE

We're a bit apprehensive about Flexidynamic Holdings Berhad because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Investors haven't taken kindly to these developments, since the stock has declined 32% from where it was three years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Flexidynamic Holdings Berhad does come with some risks though, we found 5 warning signs in our investment analysis, and 2 of those can't be ignored...

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.