Focus Dynamics Group Berhad (KLSE:FOCUS) Is Experiencing Growth In Returns On Capital

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. 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. So when we looked at Focus Dynamics Group Berhad (KLSE:FOCUS) and its trend of ROCE, we really liked what we saw.

Understanding 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. To calculate this metric for Focus Dynamics Group Berhad, this is the formula:

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

0.15 = RM37m ÷ (RM291m - RM40m) (Based on the trailing twelve months to December 2021).

Thus, Focus Dynamics Group Berhad has an ROCE of 15%. On its own, that's a standard return, however it's much better than the 5.4% generated by the Hospitality industry.

See 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're interested in investigating Focus Dynamics Group Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

We're delighted to see that Focus Dynamics Group Berhad is reaping rewards from its investments and is now generating some pre-tax profits. About five years ago the company was generating losses but things have turned around because it's now earning 15% on its capital. And unsurprisingly, like most companies trying to break into the black, Focus Dynamics Group Berhad is utilizing 841% more capital than it was five years ago. This can indicate that there's plenty of opportunities to invest capital internally and at ever higher rates, both common traits of a multi-bagger.

One more thing to note, Focus Dynamics Group Berhad has decreased current liabilities to 14% of total assets over this period, which effectively reduces the amount of funding from suppliers or short-term creditors. So this improvement in ROCE has come from the business' underlying economics, which is great to see.

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

Overall, Focus Dynamics Group Berhad gets a big tick from us thanks in most part to the fact that it is now profitable and is reinvesting in its business. Given the stock has declined 22% in the last five years, this could be a good investment if the valuation and other metrics are also appealing. With that in mind, we believe the promising trends warrant this stock for further investigation.

If you'd like to know about the risks facing Focus Dynamics Group Berhad, we've discovered 4 warning signs that you should be aware of.

While Focus Dynamics Group 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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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.