Returns On Capital At APM Automotive Holdings Berhad (KLSE:APM) Paint A Concerning Picture

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Typically, we'll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. Having said that, from a first glance at APM Automotive Holdings Berhad (KLSE:APM) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

Return On Capital Employed (ROCE): What is it?

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 APM Automotive Holdings Berhad:

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

0.031 = RM46m ÷ (RM1.8b - RM313m) (Based on the trailing twelve months to March 2021).

Thus, APM Automotive Holdings Berhad has an ROCE of 3.1%. On its own, that's a low figure but it's around the 3.8% average generated by the Auto Components industry.

View our latest analysis for APM Automotive 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 want to delve into the historical earnings, revenue and cash flow of APM Automotive Holdings Berhad, check out these free graphs here.

What Does the ROCE Trend For APM Automotive Holdings Berhad Tell Us?

On the surface, the trend of ROCE at APM Automotive Holdings Berhad doesn't inspire confidence. Around five years ago the returns on capital were 5.5%, but since then they've fallen to 3.1%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. 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.

The Bottom Line On APM Automotive Holdings Berhad's ROCE

We're a bit apprehensive about APM Automotive Holdings Berhad because despite more capital being deployed in the business, returns on that capital and sales have both fallen. Long term shareholders who've owned the stock over the last five years have experienced a 24% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about APM Automotive Holdings Berhad, we've spotted 2 warning signs, and 1 of them is concerning.

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.

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