BCM Alliance Berhad (KLSE:BCMALL) Will Want To Turn Around Its Return Trends

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating BCM Alliance Berhad (KLSE:BCMALL), we don't think it's current trends fit the mold of a multi-bagger.

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

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. To calculate this metric for BCM Alliance Berhad, this is the formula:

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

0.0017 = RM315k ÷ (RM205m - RM16m) (Based on the trailing twelve months to September 2021).

So, BCM Alliance Berhad has an ROCE of 0.2%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 7.5%.

View our latest analysis for BCM Alliance Berhad

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

What Can We Tell From BCM Alliance Berhad's ROCE Trend?

On the surface, the trend of ROCE at BCM Alliance Berhad doesn't inspire confidence. Over the last five years, returns on capital have decreased to 0.2% from 24% 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, BCM Alliance Berhad has decreased its current liabilities to 7.6% of total assets. That could partly explain why the ROCE has dropped. 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.

What We Can Learn From BCM Alliance Berhad's ROCE

In summary, we're somewhat concerned by BCM Alliance Berhad's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last five years have experienced a 65% 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.

BCM Alliance Berhad does have some risks, we noticed 4 warning signs (and 2 which are concerning) we think you should know about.

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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.