Investors Could Be Concerned With 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? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. Although, when we looked at SFP Tech Holdings Berhad (KLSE:SFPTECH), it didn't seem to tick all of these boxes.

Understanding Return On Capital Employed (ROCE)

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. 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)

0.18 = RM41m ÷ (RM276m - RM51m) (Based on the trailing twelve months to June 2023).

Thus, SFP Tech Holdings Berhad has an ROCE of 18%. On its own, that's a standard return, however it's much better than the 9.3% generated by the Machinery industry.

View our latest analysis for SFP Tech Holdings Berhad

Above you can see how the current ROCE for SFP Tech Holdings Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering SFP Tech Holdings Berhad here for free.

The Trend Of ROCE

In terms of SFP Tech Holdings Berhad's historical ROCE movements, the trend isn't fantastic. Around four years ago the returns on capital were 24%, but since then they've fallen to 18%. 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.

What We Can Learn From 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 the stock has followed suit returning a meaningful 75% to shareholders over the last year. So while investors seem to be recognizing these promising trends, we would look further into this stock to make sure the other metrics justify the positive view.

Like most companies, SFP Tech Holdings Berhad does come with some risks, and we've found 1 warning sign that you should be aware of.

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.