Capital Allocation Trends At Ajinomoto (Malaysia) Berhad (KLSE:AJI) Aren't Ideal

If you're looking for a multi-bagger, there's a few things to keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after briefly looking over the numbers, we don't think Ajinomoto (Malaysia) Berhad (KLSE:AJI) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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. To calculate this metric for Ajinomoto (Malaysia) Berhad, this is the formula:

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

0.12 = RM69m ÷ (RM640m - RM55m) (Based on the trailing twelve months to December 2020).

Therefore, Ajinomoto (Malaysia) Berhad has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 7.3% generated by the Food industry.

See our latest analysis for Ajinomoto (Malaysia) Berhad

In the above chart we have measured Ajinomoto (Malaysia) Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Ajinomoto (Malaysia) Berhad.

So How Is Ajinomoto (Malaysia) Berhad's ROCE Trending?

On the surface, the trend of ROCE at Ajinomoto (Malaysia) Berhad doesn't inspire confidence. Around five years ago the returns on capital were 16%, but since then they've fallen to 12%. However it looks like Ajinomoto (Malaysia) Berhad might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.

The Bottom Line

In summary, Ajinomoto (Malaysia) Berhad is reinvesting funds back into the business for growth but unfortunately it looks like sales haven't increased much just yet. Although the market must be expecting these trends to improve because the stock has gained 59% 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.

One more thing to note, we've identified 1 warning sign with Ajinomoto (Malaysia) Berhad and understanding it should be part of your investment process.

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. 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.
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