What We Make Of Computer Forms (Malaysia) Berhad's (KLSE:CFM) 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? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Speaking of which, we noticed some great changes in Computer Forms (Malaysia) Berhad's (KLSE:CFM) returns on capital, so let's have a look.

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. The formula for this calculation on Computer Forms (Malaysia) Berhad is:

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

0.013 = RM645k ÷ (RM56m - RM7.4m) (Based on the trailing twelve months to September 2020).

Thus, Computer Forms (Malaysia) Berhad has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 5.2%.

See our latest analysis for Computer Forms (Malaysia) Berhad

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how Computer Forms (Malaysia) Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

We're delighted to see that Computer Forms (Malaysia) Berhad is reaping rewards from its investments and has now broken into profitability. The company was generating losses five years ago, but now it's turned around, earning 1.3% which is no doubt a relief for some early shareholders. At first glance, it seems the business is getting more proficient at generating returns, because over the same period, the amount of capital employed has reduced by 21%. This could potentially mean that the company is selling some of its assets.

The Key Takeaway

From what we've seen above, Computer Forms (Malaysia) Berhad has managed to increase it's returns on capital all the while reducing it's capital base. And with the stock having performed exceptionally well over the last five years, these patterns are being accounted for by investors. Therefore, we think it would be worth your time to check if these trends are going to continue.

Computer Forms (Malaysia) Berhad does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those can't be ignored...

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. 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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