Slowing Rates Of Return At Fraser & Neave Holdings Bhd (KLSE:F&N) Leave Little Room For Excitement

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. With that in mind, the ROCE of Fraser & Neave Holdings Bhd (KLSE:F&N) looks decent, right now, so lets see what the trend of returns can tell us.

Understanding 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. 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 = RM589m ÷ (RM5.0b - RM870m) (Based on the trailing twelve months to December 2022).

Thus, Fraser & Neave Holdings Bhd has an ROCE of 14%. In isolation, that's a pretty standard return but against the Beverage industry average of 22%, it's not as good.

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'd like, you can check out the forecasts from the analysts covering Fraser & Neave Holdings Bhd here for free.

What Does the ROCE Trend For Fraser & Neave Holdings Bhd Tell Us?

The trend of ROCE doesn't stand out much, but returns on a whole are decent. The company has consistently earned 14% for the last five years, and the capital employed within the business has risen 78% in that time. 14% is a pretty standard return, and it provides some comfort knowing that Fraser & Neave Holdings Bhd has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

One more thing to note, even though ROCE has remained relatively flat over the last five years, the reduction in current liabilities to 18% of total assets, is good to see from a business owner's perspective. This can eliminate some of the risks inherent in the operations because the business has less outstanding obligations to their suppliers and or short-term creditors than they did previously.

The Key Takeaway

In the end, Fraser & Neave Holdings Bhd has proven its ability to adequately reinvest capital at good rates of return. Yet over the last five years the stock has declined 12%, so the decline might provide an opening. That's why we think it'd be worthwhile to look further into this stock given the fundamentals are appealing.

If you want to continue researching Fraser & Neave Holdings Bhd, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Fraser & Neave Holdings Bhd 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.