Fiamma Holdings Berhad (KLSE:FIAMMA) Is Reinvesting At Lower Rates Of Return

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Although, when we looked at Fiamma Holdings Berhad (KLSE:FIAMMA), it didn't seem to tick all of these boxes.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Fiamma Holdings Berhad, this is the formula:

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

0.069 = RM49m ÷ (RM948m - RM231m) (Based on the trailing twelve months to September 2023).

So, Fiamma Holdings Berhad has an ROCE of 6.9%. On its own that's a low return, but compared to the average of 5.5% generated by the Retail Distributors industry, it's much better.

View our latest analysis for Fiamma Holdings Berhad

In the above chart we have measured Fiamma Holdings 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 analyst report for Fiamma Holdings Berhad .

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

On the surface, the trend of ROCE at Fiamma Holdings Berhad doesn't inspire confidence. Over the last five years, returns on capital have decreased to 6.9% from 9.0% five years ago. 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.

The Bottom Line

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Fiamma Holdings Berhad. And long term investors must be optimistic going forward because the stock has returned a huge 157% to shareholders in the last five years. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

If you want to know some of the risks facing Fiamma Holdings Berhad we've found 3 warning signs (1 is a bit concerning!) that you should be aware of before investing here.

While Fiamma 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.