Investors Could Be Concerned With APB Resources Berhad's (KLSE:APB) Returns On Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into APB Resources Berhad (KLSE:APB), we weren't too upbeat about how things were going.

What is 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. Analysts use this formula to calculate it for APB Resources Berhad:

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

0.023 = RM3.8m ÷ (RM174m - RM10m) (Based on the trailing twelve months to December 2020).

So, APB Resources Berhad has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Machinery industry average of 10%.

View our latest analysis for APB Resources Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for APB Resources Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of APB Resources Berhad, check out these free graphs here.

What Does the ROCE Trend For APB Resources Berhad Tell Us?

We are a bit worried about the trend of returns on capital at APB Resources Berhad. Unfortunately the returns on capital have diminished from the 8.9% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 APB Resources Berhad to turn into a multi-bagger.

The Bottom Line

In summary, it's unfortunate that APB Resources Berhad is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 16% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with APB Resources Berhad (including 1 which can't be ignored) .

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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