Be Wary Of Fraser & Neave Holdings Bhd (KLSE:F&N) And Its Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look 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. Having said that, from a first glance at Fraser & Neave Holdings Bhd (KLSE:F&N) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

What Is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Fraser & Neave Holdings Bhd:

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

0.14 = RM620m ÷ (RM5.4b - RM1.0b) (Based on the trailing twelve months to March 2024).

Thus, Fraser & Neave Holdings Bhd has an ROCE of 14%. That's a pretty standard return and it's in line with the industry average of 14%.

See our latest analysis for Fraser & Neave Holdings Bhd

Above you can see how the current ROCE for Fraser & Neave Holdings Bhd compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Fraser & Neave Holdings Bhd .

So How Is Fraser & Neave Holdings Bhd's ROCE Trending?

On the surface, the trend of ROCE at Fraser & Neave Holdings Bhd doesn't inspire confidence. Around five years ago the returns on capital were 19%, but since then they've fallen to 14%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Fraser & Neave Holdings Bhd's ROCE

In summary, despite lower returns in the short term, we're encouraged to see that Fraser & Neave Holdings Bhd is reinvesting for growth and has higher sales as a result. In light of this, the stock has only gained 1.9% over the last five years. Therefore we'd recommend looking further into this stock to confirm if it has the makings of a good investment.

Fraser & Neave Holdings Bhd could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation for F&N on our platform quite valuable.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.

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