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'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at FoundPac Group Berhad (KLSE:FPGROUP) 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. The formula for this calculation on FoundPac Group Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.13 = RM14m ÷ (RM111m - RM5.2m) (Based on the trailing twelve months to December 2020).
Thus, FoundPac Group Berhad has an ROCE of 13%. By itself that's a normal return on capital and it's in line with the industry's average returns of 13%.
Above you can see how the current ROCE for FoundPac Group Berhad 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 report on analyst forecasts for the company.
The Trend Of ROCE
On the surface, the trend of ROCE at FoundPac Group Berhad doesn't inspire confidence. To be more specific, ROCE has fallen from 42% over the last five years. However it looks like FoundPac Group Berhad might be reinvesting for long term growth because while capital employed has increased, the company's sales haven't changed much in the last 12 months. It may take some time before the company starts to see any change in earnings from these investments.
What We Can Learn From FoundPac Group Berhad's ROCE
To conclude, we've found that FoundPac Group Berhad is reinvesting in the business, but returns have been falling. Investors must think there's better things to come because the stock has knocked it out of the park, delivering a 315% gain to shareholders who have held over the last three years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.
FoundPac Group Berhad could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.
While FoundPac Group 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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FoundPac Group Berhad
FoundPac Group Berhad, an investment holding company, designs, develops, manufactures, markets, and sells precision engineering parts and laser stencils in Malaysia, rest of Asia, Europe, North America, and internationally.
Flawless balance sheet with proven track record.