Be Wary Of Focus Dynamics Group Berhad (KLSE:FOCUS) And Its Returns On Capital

What trends should we look for it we want to identify stocks that can multiply in value over the long term? In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. However, after briefly looking over the numbers, we don't think Focus Dynamics Group Berhad (KLSE:FOCUS) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. The formula for this calculation on Focus Dynamics Group Berhad is:

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

0.02 = RM3.6m ÷ (RM236m - RM59m) (Based on the trailing twelve months to September 2024).

Thus, Focus Dynamics Group Berhad has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 7.3%.

Check out our latest analysis for Focus Dynamics Group Berhad

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

What The Trend Of ROCE Can Tell Us

On the surface, the trend of ROCE at Focus Dynamics Group Berhad doesn't inspire confidence. Around five years ago the returns on capital were 9.9%, but since then they've fallen to 2.0%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

On a side note, Focus Dynamics Group Berhad has done well to pay down its current liabilities to 25% 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.

What We Can Learn From Focus Dynamics Group Berhad's ROCE

To conclude, we've found that Focus Dynamics Group Berhad is reinvesting in the business, but returns have been falling. It seems that investors have little hope of these trends getting any better and that may have partly contributed to the stock collapsing 91% in the last five years. Therefore based on the analysis done in this article, we don't think Focus Dynamics Group Berhad has the makings of a multi-bagger.

If you'd like to know more about Focus Dynamics Group Berhad, we've spotted 3 warning signs, and 2 of them shouldn'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. 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.