Here's What We Make Of UMW Holdings Berhad's (KLSE:UMW) Returns On Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, UMW Holdings Berhad (KLSE:UMW) we aren't filled with optimism, but let's investigate further.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on UMW Holdings Berhad is:

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

0.014 = RM112m ÷ (RM10b - RM1.9b) (Based on the trailing twelve months to June 2020).

Therefore, UMW Holdings Berhad has an ROCE of 1.4%. In absolute terms, that's a low return and it also under-performs the Auto industry average of 5.2%.

See our latest analysis for UMW Holdings Berhad

Above you can see how the current ROCE for UMW Holdings Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for UMW Holdings Berhad.

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

In terms of UMW Holdings Berhad's historical ROCE trend, it isn't fantastic. To be more specific, today's ROCE was 8.2% five years ago but has since fallen to 1.4%. On top of that, the business is utilizing 30% less capital within its operations. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

On a side note, UMW Holdings Berhad has done well to pay down its current liabilities to 19% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Since the business is basically funding more of its operations with it's own money, you could argue this has made the business less efficient at generating ROCE.

In Conclusion...

To see UMW Holdings Berhad reducing the capital employed in the business in tandem with diminishing returns, is concerning. Investors haven't taken kindly to these developments, since the stock has declined 62% 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.

On a final note, we've found 1 warning sign for UMW Holdings Berhad that we think you should be aware of.

While UMW Holdings 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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This article by Simply Wall St is general in nature. 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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