Berjaya Food Berhad's (KLSE:BJFOOD) Returns On Capital Not Reflecting Well On The Business

What are the early trends we should look for to identify a stock that could multiply in value over the long term? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Berjaya Food Berhad (KLSE:BJFOOD), it didn't seem to tick all of these boxes.

What Is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Berjaya Food Berhad, this is the formula:

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

0.0037 = RM3.0m ÷ (RM1.4b - RM598m) (Based on the trailing twelve months to June 2024).

Thus, Berjaya Food Berhad has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 5.9%.

Check out our latest analysis for Berjaya Food Berhad

In the above chart we have measured Berjaya Food Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Berjaya Food Berhad for free.

What Can We Tell From Berjaya Food Berhad's ROCE Trend?

When we looked at the ROCE trend at Berjaya Food Berhad, we didn't gain much confidence. To be more specific, ROCE has fallen from 10% over the last five years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Berjaya Food Berhad's current liabilities are still rather high at 42% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Berjaya Food Berhad's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Berjaya Food Berhad have fallen, meanwhile the business is employing more capital than it was five years ago. However the stock has delivered a 49% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Like most companies, Berjaya Food Berhad does come with some risks, and we've found 1 warning sign that you should be aware of.

While Berjaya Food 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.