Returns On Capital At Federal International Holdings Berhad (KLSE:FIHB) Have Hit The Brakes

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after investigating Federal International Holdings Berhad (KLSE:FIHB), we don't think it's current trends fit the mold of a multi-bagger.

What Is Return On Capital Employed (ROCE)?

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 Federal International Holdings Berhad is:

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

0.097 = RM14m ÷ (RM199m - RM58m) (Based on the trailing twelve months to December 2022).

Therefore, Federal International Holdings Berhad has an ROCE of 9.7%. Even though it's in line with the industry average of 9.8%, it's still a low return by itself.

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 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 trend, it doesn't exactly demand attention. The company has employed 27% more capital in the last five years, and the returns on that capital have remained stable at 9.7%. This poor ROCE doesn't inspire confidence right now, and with the increase in capital employed, it's evident that the business isn't deploying the funds into high return investments.

The Bottom Line On Federal International Holdings Berhad's ROCE

In conclusion, Federal International Holdings Berhad has been investing more capital into the business, but returns on that capital haven't increased. Although the market must be expecting these trends to improve because the stock has gained 74% over the last five years. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.

Federal International Holdings Berhad does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is concerning...

While Federal International Holdings Berhad 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. 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.