Returns At Fiamma Holdings Berhad (KLSE:FIAMMA) Are On The Way Up

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base 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. So when we looked at Fiamma Holdings Berhad (KLSE:FIAMMA) and its trend of ROCE, we really liked what we saw.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Fiamma Holdings Berhad:

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

0.12 = RM74m ÷ (RM828m - RM219m) (Based on the trailing twelve months to December 2020).

Therefore, Fiamma Holdings Berhad has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Retail Distributors industry average of 5.5% it's much better.

See our latest analysis for Fiamma Holdings Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Fiamma Holdings Berhad's ROCE against it's prior returns. If you're interested in investigating Fiamma Holdings Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Fiamma Holdings Berhad's ROCE Trend?

The trends we've noticed at Fiamma Holdings Berhad are quite reassuring. Over the last five years, returns on capital employed have risen substantially to 12%. The amount of capital employed has increased too, by 23%. So we're very much inspired by what we're seeing at Fiamma Holdings Berhad thanks to its ability to profitably reinvest capital.

The Key Takeaway

To sum it up, Fiamma Holdings Berhad has proven it can reinvest in the business and generate higher returns on that capital employed, which is terrific. And given the stock has remained rather flat over the last five years, there might be an opportunity here if other metrics are strong. That being the case, research into the company's current valuation metrics and future prospects seems fitting.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Fiamma Holdings Berhad (of which 1 is significant!) that you should know about.

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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