Returns On Capital At JF Technology Berhad (KLSE:JFTECH) Paint A Concerning Picture

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount 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 JF Technology Berhad (KLSE:JFTECH) 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)

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 JF Technology Berhad:

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

0.014 = RM2.0m ÷ (RM148m - RM7.0m) (Based on the trailing twelve months to September 2024).

Therefore, JF Technology Berhad has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Semiconductor industry average of 8.8%.

Check out our latest analysis for JF Technology Berhad

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

What The Trend Of ROCE Can Tell Us

In terms of JF Technology Berhad's historical ROCE movements, the trend isn't fantastic. Over the last five years, returns on capital have decreased to 1.4% from 5.8% five years ago. On the other hand, the company has been employing more capital without a corresponding improvement in sales in the last year, which could suggest these investments are longer term plays. It's worth keeping an eye on the company's earnings from here on to see if these investments do end up contributing to the bottom line.

What We Can Learn From JF Technology Berhad's ROCE

Bringing it all together, while we're somewhat encouraged by JF Technology Berhad's reinvestment in its own business, we're aware that returns are shrinking. Although the market must be expecting these trends to improve because the stock has gained 59% over the last five years. However, unless these underlying trends turn more positive, we wouldn't get our hopes up too high.

On a final note, we've found 1 warning sign for JF Technology Berhad that we think you should be aware of.

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. 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.