Bina Darulaman Berhad (KLSE:BDB) Could Be Struggling To Allocate Capital

What underlying fundamental trends can indicate that a company might be in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. Having said that, after a brief look, Bina Darulaman Berhad (KLSE:BDB) we aren't filled with optimism, but let's investigate further.

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. To calculate this metric for Bina Darulaman Berhad, this is the formula:

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

0.026 = RM13m ÷ (RM697m - RM199m) (Based on the trailing twelve months to December 2021).

So, Bina Darulaman Berhad has an ROCE of 2.6%. Ultimately, that's a low return and it under-performs the Construction industry average of 5.3%.

View our latest analysis for Bina Darulaman Berhad

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

What Does the ROCE Trend For Bina Darulaman Berhad Tell Us?

We are a bit worried about the trend of returns on capital at Bina Darulaman Berhad. Unfortunately the returns on capital have diminished from the 9.5% 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. 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 Bina Darulaman Berhad becoming one if things continue as they have.

On a side note, Bina Darulaman Berhad has done well to pay down its current liabilities to 28% of total assets. So we could link some of this to the decrease in ROCE. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

The Bottom Line On Bina Darulaman Berhad's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 19% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Bina Darulaman Berhad does have some risks, we noticed 3 warning signs (and 1 which is significant) we think you should know about.

While Bina Darulaman Berhad isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.