Kumpulan Fima Berhad (KLSE:KFIMA) Is Finding It Tricky To Allocate Its Capital

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within Kumpulan Fima Berhad (KLSE:KFIMA), we weren't too hopeful.

Return On Capital Employed (ROCE): What is it?

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. To calculate this metric for Kumpulan Fima Berhad, this is the formula:

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

0.069 = RM78m ÷ (RM1.3b - RM143m) (Based on the trailing twelve months to December 2020).

Therefore, Kumpulan Fima Berhad has an ROCE of 6.9%. In absolute terms, that's a low return and it also under-performs the Industrials industry average of 9.7%.

Check out our latest analysis for Kumpulan Fima Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kumpulan Fima Berhad's ROCE against it's prior returns. If you're interested in investigating Kumpulan Fima Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

In terms of Kumpulan Fima Berhad's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 10%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Kumpulan Fima Berhad becoming one if things continue as they have.

In Conclusion...

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Despite the concerning underlying trends, the stock has actually gained 38% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Kumpulan Fima Berhad (including 1 which can't be ignored) .

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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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