Aimflex Berhad (KLSE:AIMFLEX) hopes to turn its returns into capital
There are a few key trends to look out for if we want to identify the next multi-bagger. Ideally, a business will show two trends; first growth come back on capital employed (ROCE) and on the other hand, growth amount capital employed. Basically, this means that a business has profitable initiatives that it can continue to reinvest in, which is a hallmark of a blending machine. However, after briefly looking at the numbers, we don’t think Aimflex Berhad (KLSE:AIMFLEX) has the makings of a multi-bagger in the future, but let’s see why it may be.
What is return on capital employed (ROCE)?
Just to clarify if you’re not sure, ROCE is a measure of the pre-tax income (as a percentage) that a business earns on the capital invested in its business. The formula for this calculation on Aimflex Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.11 = RM9.1m ÷ (RM100m – RM18m) (Based on the last twelve months to March 2022).
Therefore, Aimflex Berhad posted a ROCE of 11%. In absolute terms, this is a fairly normal return, and somewhat close to the machinery industry average of 12%.
Check out our latest review for Aimflex Berhad
Although the past is not indicative of the future, it can be useful to know the historical performance of a company, which is why we have this graph above. If you want to dive deep into Aimflex Berhad’s earnings, revenue, and cash flow history, check out these free graphics here.
What can we say about the ROCE trend of Aimflex Berhad?
When we looked at the ROCE trend at Aimflex Berhad, we didn’t gain much confidence. Over the past five years, capital returns have declined to 11% from 27% five years ago. On the other hand, the company has employed more capital without a corresponding improvement in sales over the past year, which might suggest that these investments are longer-term investments. It may take some time before the company begins to see a change in the income from these investments.
By the way, Aimflex Berhad did well to repay its current liabilities at 18% of total assets. So we could tie some of that to the decline in ROCE. Additionally, it may reduce some aspects of risk to the business, as the business’s suppliers or short-term creditors now fund less of its operations. Since the company is essentially funding more of its operations with its own money, one could argue that this has made the company less efficient at generating ROCE.
The Key Takeaway
In summary, while we are somewhat encouraged by Aimflex Berhad’s reinvestment in its own business, we are aware that returns are diminishing. And over the past year, the stock has fallen 36%, so the market doesn’t seem too optimistic that these trends will strengthen anytime soon. Therefore, based on the analysis performed in this article, we do not believe that Aimflex Berhad has the makings of a multi-bagger.
Aimflex Berhad has some risks, we have noticed 3 warning signs (and 1 that doesn’t sit well with us) we think you should know.
Although Aimflex Berhad doesn’t get the highest yield, check out this free list of companies that achieve high returns on equity with strong balance sheets.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.