These Metrics Don't Make Chuan Huat Resources Berhad (KLSE:CHUAN) Look Too Strong

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into Chuan Huat Resources Berhad (KLSE:CHUAN), we weren't too upbeat about how things were going.

Understanding 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. To calculate this metric for Chuan Huat Resources Berhad, this is the formula:

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

0.0066 = RM2.3m ÷ (RM582m - RM233m) (Based on the trailing twelve months to September 2020).

Therefore, Chuan Huat Resources Berhad has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 7.3%.

See our latest analysis for Chuan Huat Resources Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Chuan Huat Resources Berhad's ROCE against it's prior returns. If you'd like to look at how Chuan Huat Resources 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 Chuan Huat Resources Berhad Tell Us?

We are a bit worried about the trend of returns on capital at Chuan Huat Resources Berhad. Unfortunately the returns on capital have diminished from the 3.8% 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. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Chuan Huat Resources Berhad becoming one if things continue as they have.

On a separate but related note, it's important to know that Chuan Huat Resources Berhad has a current liabilities to total assets ratio of 40%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Chuan Huat Resources Berhad's ROCE

In summary, it's unfortunate that Chuan Huat Resources Berhad is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 17% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Chuan Huat Resources Berhad does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are significant...

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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