Yahoo Finance Here's What's Concerning About Ajinomoto (Malaysia) Berhad's (KLSE:AJI) Returns On Capital
To find a multi-bagger stock, what are the underlying trends we should look for in a business? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Having said that, from a first glance at Ajinomoto (Malaysia) Berhad (KLSE:AJI) 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)
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 Ajinomoto (Malaysia) Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0031 = RM1.9m ÷ (RM733m - RM134m) (Based on the trailing twelve months to June 2022).
So, Ajinomoto (Malaysia) Berhad has an ROCE of 0.3%. Ultimately, that's a low return and it under-performs the Food industry average of 12%.
View our latest analysis for Ajinomoto (Malaysia) Berhad
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating Ajinomoto (Malaysia) Berhad's past further, check out this free graph of past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
When we looked at the ROCE trend at Ajinomoto (Malaysia) Berhad, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 0.3% from 11% five years ago. 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. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.
On a side note, Ajinomoto (Malaysia) Berhad's current liabilities have increased over the last five years to 18% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 0.3%. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.
The Bottom Line On Ajinomoto (Malaysia) Berhad's ROCE
In summary, despite lower returns in the short term, we're encouraged to see that Ajinomoto (Malaysia) 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 35% over the last five years. As a result, we'd recommend researching this stock further to uncover what other fundamentals of the business can show us.
If you want to know some of the risks facing Ajinomoto (Malaysia) Berhad we've found 3 warning signs (2 are potentially serious!) that you should be aware of before investing here.
While Ajinomoto (Malaysia) Berhad isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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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.
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