Coastal Contracts Bhd's (KLSE:COASTAL) Returns On Capital Not Reflecting Well On The Business

What financial metrics can indicate to us that a company is maturing or even in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. 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 we looked into Coastal Contracts Bhd (KLSE:COASTAL), the trends above didn't look too great.

What is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. Analysts use this formula to calculate it for Coastal Contracts Bhd:

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

0.028 = RM33m ÷ (RM1.4b - RM241m) (Based on the trailing twelve months to June 2021).

Thus, Coastal Contracts Bhd has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Machinery industry average of 10.0%.

See 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'd like to look at how Coastal Contracts Bhd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

The trend of ROCE at Coastal Contracts Bhd is showing some signs of weakness. To be more specific, today's ROCE was 4.4% five years ago but has since fallen to 2.8%. In addition to that, Coastal Contracts Bhd is now employing 43% less capital than it was five years ago. 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.

Our Take On Coastal Contracts Bhd's ROCE

To see Coastal Contracts Bhd reducing the capital employed in the business in tandem with diminishing returns, is concerning. Investors haven't taken kindly to these developments, since the stock has declined 45% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

While Coastal Contracts Bhd doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

While Coastal Contracts Bhd 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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