Be Wary Of Federal International Holdings Berhad (KLSE:FIHB) And Its Returns On Capital

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Federal International Holdings Berhad (KLSE:FIHB), we weren't too hopeful.

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. To calculate this metric for Federal International Holdings Berhad, this is the formula:

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

0.026 = RM3.0m ÷ (RM190m - RM76m) (Based on the trailing twelve months to September 2024).

So, Federal International Holdings Berhad has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 6.9%.

View our latest analysis for Federal International Holdings Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Federal International Holdings Berhad's ROCE against it's prior returns. If you'd like to look at how Federal International Holdings Berhad has performed in the past in other metrics, you can view this free graph of Federal International Holdings Berhad's past earnings, revenue and cash flow.

What Does the ROCE Trend For Federal International Holdings Berhad Tell Us?

In terms of Federal International Holdings Berhad's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 11% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect Federal International Holdings Berhad to turn into a multi-bagger.

Another thing to note, Federal International Holdings Berhad has a high ratio of current liabilities to total assets of 40%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

What We Can Learn From Federal International Holdings Berhad's ROCE

In summary, it's unfortunate that Federal International Holdings Berhad is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 21% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing: We've identified 3 warning signs with Federal International Holdings Berhad (at least 1 which is significant) , and understanding these would certainly be useful.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.