Is AYS Ventures Berhad (KLSE:AYS) Set To Make A Turnaround?

What financial metrics can indicate to us that a company is maturing or even in decline? 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. Basically the company is earning less on its investments and it is also reducing its total assets. On that note, looking into AYS Ventures Berhad (KLSE:AYS), we weren't too upbeat about how things were going.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on AYS Ventures Berhad is:

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

0.01 = RM2.7m ÷ (RM731m - RM464m) (Based on the trailing twelve months to September 2020).

Therefore, AYS Ventures Berhad has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 6.3%.

See our latest analysis for AYS Ventures 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're interested in investigating AYS Ventures Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For AYS Ventures Berhad Tell Us?

We are a bit worried about the trend of returns on capital at AYS Ventures Berhad. About five years ago, returns on capital were 11%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on AYS Ventures Berhad becoming one if things continue as they have.

On a separate but related note, it's important to know that AYS Ventures Berhad has a current liabilities to total assets ratio of 63%, which we'd consider pretty high. 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.

Our Take On AYS Ventures Berhad's ROCE

In summary, it's unfortunate that AYS Ventures Berhad is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 15% in the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you want to know some of the risks facing AYS Ventures Berhad we've found 4 warning signs (2 don't sit too well with us!) that you should be aware of before investing here.

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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