Did you know there are some financial metrics that can provide clues of a potential multi-bagger? 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at SFP Tech Holdings Berhad (KLSE:SFPTECH) 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. The formula for this calculation on SFP Tech Holdings Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.082 = RM22m ÷ (RM321m - RM56m) (Based on the trailing twelve months to December 2024).
Therefore, SFP Tech Holdings Berhad has an ROCE of 8.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 8.2%.
View our latest analysis for SFP Tech Holdings Berhad
In the above chart we have measured SFP Tech Holdings Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering SFP Tech Holdings Berhad for free.
What Does the ROCE Trend For SFP Tech Holdings Berhad Tell Us?
On the surface, the trend of ROCE at SFP Tech Holdings Berhad doesn't inspire confidence. Around five years ago the returns on capital were 23%, but since then they've fallen to 8.2%. 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 SFP Tech Holdings Berhad's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that SFP Tech Holdings Berhad is reinvesting for growth and has higher sales as a result. These growth trends haven't led to growth returns though, since the stock has fallen 62% over the last year. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.