Some Investors May Be Worried About Aneka Jaringan Holdings Berhad's (KLSE:ANEKA) Returns On Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. In light of that, from a first glance at Aneka Jaringan Holdings Berhad (KLSE:ANEKA), we've spotted some signs that it could be struggling, so let's investigate.

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 Aneka Jaringan Holdings Berhad is:

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

0.043 = RM5.0m ÷ (RM234m - RM119m) (Based on the trailing twelve months to August 2024).

Thus, Aneka Jaringan Holdings Berhad has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 11%.

See our latest analysis for Aneka Jaringan Holdings Berhad

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

How Are Returns Trending?

In terms of Aneka Jaringan Holdings Berhad's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 27% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Aneka Jaringan Holdings Berhad becoming one if things continue as they have.

On a side note, Aneka Jaringan Holdings Berhad's current liabilities are still rather high at 51% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

In summary, it's unfortunate that Aneka Jaringan Holdings Berhad is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 20% over the last three years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Like most companies, Aneka Jaringan Holdings Berhad does come with some risks, and we've found 3 warning signs that you should be aware of.

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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.