Investors Could Be Concerned With Flexidynamic Holdings Berhad's (KLSE:FLEXI) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at Flexidynamic Holdings Berhad (KLSE:FLEXI) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Flexidynamic Holdings Berhad is:

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

0.089 = RM4.2m ÷ (RM82m - RM35m) (Based on the trailing twelve months to September 2022).

Thus, Flexidynamic Holdings Berhad has an ROCE of 8.9%. Ultimately, that's a low return and it under-performs the Machinery industry average of 13%.

Check out 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're interested in investigating Flexidynamic Holdings Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at Flexidynamic Holdings Berhad doesn't inspire confidence. Around four years ago the returns on capital were 25%, but since then they've fallen to 8.9%. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

On a side note, Flexidynamic Holdings Berhad's current liabilities are still rather high at 42% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

In Conclusion...

Bringing it all together, while we're somewhat encouraged by Flexidynamic Holdings Berhad's reinvestment in its own business, we're aware that returns are shrinking. And in the last year, the stock has given away 49% so the market doesn't look too hopeful on these trends strengthening any time soon. Therefore based on the analysis done in this article, we don't think Flexidynamic Holdings Berhad has the makings of a multi-bagger.

Flexidynamic Holdings Berhad does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those can't be ignored...

While Flexidynamic Holdings 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. 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.