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

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing 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.

We've discovered 3 warning signs about SFP Tech Holdings Berhad. View them for free.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on SFP Tech Holdings Berhad is:

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

0.095 = RM26m ÷ (RM340m - RM71m) (Based on the trailing twelve months to December 2024).

Thus, SFP Tech Holdings Berhad has an ROCE of 9.5%. In absolute terms, that's a low return, but it's much better than the Machinery industry average of 7.6%.

View 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're interested, you can view the analysts predictions in our free analyst report for SFP Tech Holdings Berhad .

What Can We Tell From SFP Tech Holdings Berhad's ROCE Trend?

On the surface, the trend of ROCE at SFP Tech Holdings Berhad doesn't inspire confidence. To be more specific, ROCE has fallen from 23% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

The Bottom Line 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. These growth trends haven't led to growth returns though, since the stock has fallen 69% over the last year. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.

One more thing: We've identified 3 warning signs with SFP Tech Holdings Berhad (at least 2 which don't sit too well with us) , and understanding them would certainly be useful.

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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.