Returns On Capital Are Showing Encouraging Signs At FGV Holdings Berhad (KLSE:FGV)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. So when we looked at FGV Holdings Berhad (KLSE:FGV) and its trend of ROCE, we really liked what we saw.

What Is 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 FGV Holdings Berhad:

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

0.046 = RM615m ÷ (RM18b - RM4.7b) (Based on the trailing twelve months to June 2024).

So, FGV Holdings Berhad has an ROCE of 4.6%. Ultimately, that's a low return and it under-performs the Food industry average of 8.8%.

See our latest analysis for FGV Holdings Berhad

Above you can see how the current ROCE for FGV Holdings Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for FGV Holdings Berhad .

What Does the ROCE Trend For FGV Holdings Berhad Tell Us?

Shareholders will be relieved that FGV Holdings Berhad has broken into profitability. The company was generating losses five years ago, but has managed to turn it around and as we saw earlier is now earning 4.6%, which is always encouraging. Interestingly, the capital employed by the business has remained relatively flat, so these higher returns are either from prior investments paying off or increased efficiencies. With no noticeable increase in capital employed, it's worth knowing what the company plans on doing going forward in regards to reinvesting and growing the business. After all, a company can only become a long term multi-bagger if it continually reinvests in itself at high rates of return.

In Conclusion...

As discussed above, FGV Holdings Berhad appears to be getting more proficient at generating returns since capital employed has remained flat but earnings (before interest and tax) are up. And investors seem to expect more of this going forward, since the stock has rewarded shareholders with a 60% return over the last five years. In light of that, we think it's worth looking further into this stock because if FGV Holdings Berhad can keep these trends up, it could have a bright future ahead.

One more thing to note, we've identified 3 warning signs with FGV Holdings Berhad and understanding these should be part of your investment process.

While FGV Holdings Berhad isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.