Coastal Contracts Bhd (KLSE:COASTAL) May Have Issues Allocating Its Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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 Coastal Contracts Bhd (KLSE:COASTAL), we weren't too upbeat about how things were going.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Coastal Contracts Bhd is:

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

0.036 = RM43m ÷ (RM1.4b - RM265m) (Based on the trailing twelve months to September 2021).

Thus, Coastal Contracts Bhd has an ROCE of 3.6%. Ultimately, that's a low return and it under-performs the Machinery industry average of 11%.

View our latest analysis for Coastal Contracts Bhd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Coastal Contracts Bhd's ROCE against it's prior returns. If you're interested in investigating Coastal Contracts Bhd's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From Coastal Contracts Bhd's ROCE Trend?

In terms of Coastal Contracts Bhd's historical ROCE trend, it isn't fantastic. The company used to generate 5.4% on its capital five years ago but it has since fallen noticeably. In addition to that, Coastal Contracts Bhd is now employing 44% 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.

What We Can Learn From Coastal Contracts Bhd's ROCE

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. In spite of that, the stock has delivered a 23% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you want to continue researching Coastal Contracts Bhd, you might be interested to know about the 1 warning sign that our analysis has discovered.

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.

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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.