Here's What's Concerning About SFP Tech Holdings Berhad's (KLSE:SFPTECH) Returns On Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. In light of that, when we looked at SFP Tech Holdings Berhad (KLSE:SFPTECH) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

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. Analysts use this formula to calculate it for SFP Tech Holdings Berhad:

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

0.17 = RM37m ÷ (RM254m - RM36m) (Based on the trailing twelve months to March 2023).

So, SFP Tech Holdings Berhad has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Machinery industry average of 11% it's much better.

See our latest analysis for SFP Tech Holdings Berhad

In the above chart we have measured SFP Tech Holdings Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering SFP Tech Holdings Berhad here for free.

What Does the ROCE Trend For SFP Tech Holdings Berhad Tell Us?

On the surface, the trend of ROCE at SFP Tech Holdings Berhad doesn't inspire confidence. Over the last four years, returns on capital have decreased to 17% from 25% four years ago. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

Our Take On SFP Tech Holdings Berhad's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for SFP Tech Holdings Berhad. And long term investors must be optimistic going forward because the stock has returned a huge 456% to shareholders in the last year. So should these growth trends continue, we'd be optimistic on the stock going forward.

If you'd like to know about the risks facing SFP Tech Holdings Berhad, we've discovered 1 warning sign that you should be aware of.

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. 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.