If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. In a perfect world, we'd like to see a company investing more capital into its business and ideally the returns earned from that capital are also increasing. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at GFM Services Berhad (KLSE:GFM) and its ROCE trend, we weren't exactly thrilled.
What Is 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. Analysts use this formula to calculate it for GFM Services Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.11 = RM53m ÷ (RM515m - RM52m) (Based on the trailing twelve months to June 2023).
Therefore, GFM Services Berhad has an ROCE of 11%. On its own, that's a standard return, however it's much better than the 7.8% generated by the Commercial Services industry.
Check out our latest analysis for GFM Services Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for GFM Services Berhad's ROCE against it's prior returns. If you'd like to look at how GFM Services Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
When we looked at the ROCE trend at GFM Services Berhad, we didn't gain much confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 11%. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
Our Take On GFM Services 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 GFM Services Berhad. However, despite the promising trends, the stock has fallen 50% over the last five years, so there might be an opportunity here for astute investors. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.