We're Watching These Trends At Asia File Corporation Bhd (KLSE:ASIAFLE)

If you're looking for a multi-bagger, there's a few things to keep an eye out for. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at Asia File Corporation Bhd (KLSE:ASIAFLE) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on Asia File Corporation Bhd is:

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

0.033 = RM21m ÷ (RM688m - RM43m) (Based on the trailing twelve months to June 2020).

Therefore, Asia File Corporation Bhd has an ROCE of 3.3%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 5.1%.

Check out our latest analysis for Asia File Corporation Bhd

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

The Trend Of ROCE

On the surface, the trend of ROCE at Asia File Corporation Bhd doesn't inspire confidence. Around five years ago the returns on capital were 13%, but since then they've fallen to 3.3%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Key Takeaway

From the above analysis, we find it rather worrisome that returns on capital and sales for Asia File Corporation Bhd have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 54% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know more about Asia File Corporation Bhd, we've spotted 3 warning signs, and 1 of them is concerning.

While Asia File Corporation Bhd 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. 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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