Returns On Capital At Advancecon Holdings Berhad (KLSE:ADVCON) Paint A Concerning Picture

Did you know there are some financial metrics that can provide clues of a potential 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. However, after investigating Advancecon Holdings Berhad (KLSE:ADVCON), we don't think it's current trends fit the mold of a multi-bagger.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Advancecon Holdings Berhad, this is the formula:

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

0.038 = RM9.5m ÷ (RM411m - RM162m) (Based on the trailing twelve months to March 2021).

Therefore, Advancecon Holdings Berhad has an ROCE of 3.8%. Ultimately, that's a low return and it under-performs the Construction industry average of 6.5%.

See our latest analysis for Advancecon Holdings Berhad

Above you can see how the current ROCE for Advancecon 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, you can check out the forecasts from the analysts covering Advancecon Holdings Berhad here for free.

What Does the ROCE Trend For Advancecon Holdings Berhad Tell Us?

When we looked at the ROCE trend at Advancecon Holdings Berhad, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 3.8% from 29% five years ago. 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.

On a related note, Advancecon Holdings Berhad has decreased its current liabilities to 39% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. 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.

The Bottom Line On Advancecon Holdings Berhad's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Advancecon Holdings 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 16% from where it was three years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing Advancecon Holdings Berhad we've found 4 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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