Are Investors Concerned With What's Going On At Boustead Heavy Industries Corporation Berhad (KLSE:BHIC)?

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after glancing at the trends within Boustead Heavy Industries Corporation Berhad (KLSE:BHIC), we weren't too hopeful.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Boustead Heavy Industries Corporation Berhad:

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

0.016 = RM3.5m ÷ (RM483m - RM264m) (Based on the trailing twelve months to September 2020).

Thus, Boustead Heavy Industries Corporation Berhad has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Machinery industry average of 11%.

View our latest analysis for Boustead Heavy Industries Corporation Berhad

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

The Trend Of ROCE

We are a bit anxious about the trends of ROCE at Boustead Heavy Industries Corporation Berhad. To be more specific, today's ROCE was 11% five years ago but has since fallen to 1.6%. In addition to that, Boustead Heavy Industries Corporation Berhad is now employing 34% less capital than it was five years ago. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

Another thing to note, Boustead Heavy Industries Corporation Berhad has a high ratio of current liabilities to total assets of 55%. 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 Boustead Heavy Industries Corporation Berhad's ROCE

In summary, it's unfortunate that Boustead Heavy Industries Corporation Berhad is shrinking its capital base and also generating lower returns. Long term shareholders who've owned the stock over the last five years have experienced a 70% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing Boustead Heavy Industries Corporation Berhad we've found 2 warning signs (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

While Boustead Heavy Industries Corporation Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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This article by Simply Wall St is general in nature. 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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