The Returns On Capital At Bina Darulaman Berhad (KLSE:BDB) Don't Inspire Confidence

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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. And from a first read, things don't look too good at Bina Darulaman Berhad (KLSE:BDB), so let's see why.

Understanding 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. 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)

0.028 = RM14m ÷ (RM670m - RM181m) (Based on the trailing twelve months to June 2021).

Thus, Bina Darulaman Berhad has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Construction industry average of 6.0%.

See 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.

The Trend Of ROCE

In terms of Bina Darulaman Berhad's historical ROCE trend, it isn't fantastic. The company used to generate 4.1% on its capital five years ago but it has since fallen noticeably. On top of that, the business is utilizing 36% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

The Bottom Line On Bina Darulaman Berhad's ROCE

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. It should come as no surprise then that the stock has fallen 15% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for Bina Darulaman Berhad (of which 1 doesn't sit too well with us!) that 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.

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.

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