27-03-2025
Capital Allocation Trends At Fiamma Holdings Berhad (KLSE:FIAMMA) Aren't Ideal
If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? 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. 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 Fiamma Holdings Berhad (KLSE:FIAMMA) and its ROCE trend, we weren't exactly thrilled.
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 Fiamma Holdings Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.048 = RM37m ÷ (RM1.0b - RM254m) (Based on the trailing twelve months to December 2024).
Thus, Fiamma Holdings Berhad has an ROCE of 4.8%. Even though it's in line with the industry average of 4.8%, it's still a low return by itself.
See our latest analysis for Fiamma Holdings 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'd like to look at how Fiamma Holdings Berhad has performed in the past in other metrics, you can view this free graph of Fiamma Holdings Berhad's past earnings, revenue and cash flow.
Unfortunately, the trend isn't great with ROCE falling from 8.0% five years ago, while capital employed has grown 32%. Usually this isn't ideal, but given Fiamma Holdings Berhad conducted a capital raising before their most recent earnings announcement, that would've likely contributed, at least partially, to the increased capital employed figure. The funds raised likely haven't been put to work yet so it's worth watching what happens in the future with Fiamma Holdings Berhad's earnings and if they change as a result from the capital raise.
To conclude, we've found that Fiamma Holdings Berhad is reinvesting in the business, but returns have been falling. Yet to long term shareholders the stock has gifted them an incredible 174% return in the last five years, so the market appears to be rosy about its future. But if the trajectory of these underlying trends continue, we think the likelihood of it being a multi-bagger from here isn't high.
Like most companies, Fiamma Holdings Berhad does come with some risks, and we've found 1 warning sign that you should be aware of.
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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) 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.
