GFM Services Berhad (KLSE:GFM) Will Will Want To Turn Around Its Return Trends

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. However, after briefly looking over the numbers, we don't think GFM Services Berhad (KLSE:GFM) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for GFM Services Berhad:

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

0.089 = RM41m ÷ (RM516m - RM55m) (Based on the trailing twelve months to December 2020).

So, GFM Services Berhad has an ROCE of 8.9%. In absolute terms, that's a low return, but it's much better than the Commercial Services industry average of 4.5%.

Check out our latest analysis for GFM Services 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're interested in investigating GFM Services Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For GFM Services Berhad Tell Us?

In terms of GFM Services Berhad's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 25%, but since then they've fallen to 8.9%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

On a side note, GFM Services Berhad has done well to pay down its current liabilities to 11% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On GFM Services Berhad's ROCE

In summary, we're somewhat concerned by GFM Services Berhad's diminishing returns on increasing amounts of capital. It should come as no surprise then that the stock has fallen 34% over the last three 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.

On a final note, we found 5 warning signs for GFM Services Berhad (2 are a bit unpleasant) you should be aware of.

While GFM Services Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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