Is APM Automotive Holdings Berhad (KLSE:APM) Shrinking?

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. On that note, looking into APM Automotive Holdings Berhad (KLSE:APM), we weren't too upbeat about how things were going.

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 APM Automotive Holdings Berhad, this is the formula:

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

0.013 = RM18m ÷ (RM1.7b - RM302m) (Based on the trailing twelve months to September 2020).

Thus, APM Automotive Holdings Berhad has an ROCE of 1.3%. Ultimately, that's a low return and it under-performs the Auto Components industry average of 6.2%.

View our latest analysis for APM Automotive Holdings Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for APM Automotive Holdings Berhad's ROCE against it's prior returns. If you'd like to look at how APM Automotive Holdings Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From APM Automotive Holdings Berhad's ROCE Trend?

We are a bit worried about the trend of returns on capital at APM Automotive Holdings Berhad. To be more specific, the ROCE was 8.3% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect APM Automotive Holdings Berhad to turn into a multi-bagger.

The Bottom Line On APM Automotive Holdings Berhad's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. It should come as no surprise then that the stock has fallen 23% over the last five years, so it looks like investors are recognizing these changes. 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 APM Automotive Holdings Berhad, we've spotted 3 warning signs, and 1 of them doesn't sit too well with us.

While APM Automotive Holdings 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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