Investors Could Be Concerned With Agmo Holdings Berhad's (KLSE:AGMO) Returns On Capital

Did you know there are some financial metrics that can provide clues of a potential multi-bagger? One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing 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. In light of that, when we looked at Agmo Holdings Berhad (KLSE:AGMO) and its ROCE trend, we weren't exactly thrilled.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Agmo Holdings Berhad, this is the formula:

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

0.18 = RM8.5m ÷ (RM52m - RM3.9m) (Based on the trailing twelve months to March 2024).

Therefore, Agmo Holdings Berhad has an ROCE of 18%. In absolute terms, that's a satisfactory return, but compared to the Software industry average of 11% it's much better.

See our latest analysis for Agmo Holdings Berhad

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

What The Trend Of ROCE Can Tell Us

When we looked at the ROCE trend at Agmo Holdings Berhad, we didn't gain much confidence. To be more specific, ROCE has fallen from 34% over the last five years. Although, given both revenue and the amount of assets employed in the business have increased, it could suggest the company is investing in growth, and the extra capital has led to a short-term reduction in ROCE. If these investments prove successful, this can bode very well for long term stock performance.

Our Take On Agmo Holdings Berhad's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for Agmo Holdings Berhad. And the stock has followed suit returning a meaningful 7.4% to shareholders over the last year. So while the underlying trends could already be accounted for by investors, we still think this stock is worth looking into further.

Agmo Holdings Berhad does have some risks, we noticed 2 warning signs (and 1 which is significant) we think 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. 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.