Is Bermaz Auto Berhad (KLSE:BAUTO) Likely To Turn Things Around?

There are a few key trends to look for if we want to identify the next multi-bagger. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding 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. In light of that, when we looked at Bermaz Auto Berhad (KLSE:BAUTO) 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. To calculate this metric for Bermaz Auto Berhad, this is the formula:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.15 = RM108m ÷ (RM1.3b - RM561m) (Based on the trailing twelve months to April 2020).

Therefore, Bermaz Auto Berhad has an ROCE of 15%. In absolute terms, that's a satisfactory return, but compared to the Specialty Retail industry average of 11% it's much better.

Check out our latest analysis for Bermaz Auto Berhad

Above you can see how the current ROCE for Bermaz Auto Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Bermaz Auto Berhad's ROCE Trending?

In terms of Bermaz Auto Berhad's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 50%, but since then they've fallen to 15%. And considering revenue has dropped while employing more capital, we'd be cautious. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

While on the subject, we noticed that the ratio of current liabilities to total assets has risen to 44%, which has impacted the ROCE. Without this increase, it's likely that ROCE would be even lower than 15%. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

What We Can Learn From Bermaz Auto Berhad's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Bermaz Auto Berhad have fallen, meanwhile the business is employing more capital than it was five years ago. Investors haven't taken kindly to these developments, since the stock has declined 12% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you'd like to know more about Bermaz Auto Berhad, we've spotted 2 warning signs, and 1 of them can't be ignored.

While Bermaz Auto Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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