What trends should we look for it we want to identify stocks that can multiply in value over the long term? Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding 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.
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. To calculate this metric for FoundPac Group Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.17 = RM18m ÷ (RM113m - RM6.5m) (Based on the trailing twelve months to September 2020).
Thus, FoundPac Group Berhad has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Semiconductor industry average of 12% it's much better.
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'd like, you can check out the forecasts from the analysts covering FoundPac Group Berhad here for free.
What Does the ROCE Trend For FoundPac Group Berhad Tell Us?
In terms of FoundPac Group Berhad's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 17% from 45% five years ago. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.
On a related note, FoundPac Group Berhad has decreased its current liabilities to 5.8% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.
The Key Takeaway
To conclude, we've found that FoundPac Group Berhad is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 203% return in the last three years, so the market appears to be rosy about its future. Ultimately, if the underlying trends persist, we wouldn't hold our breath on it being a multi-bagger going forward.
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.
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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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.