Returns On Capital Signal Difficult Times Ahead For UEM Edgenta Berhad (KLSE:EDGENTA)

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at UEM Edgenta Berhad (KLSE:EDGENTA), we've spotted some signs that it could be struggling, so let's investigate.

Return On Capital Employed (ROCE): What Is It?

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. To calculate this metric for UEM Edgenta Berhad, this is the formula:

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

0.034 = RM68m ÷ (RM3.0b - RM922m) (Based on the trailing twelve months to June 2023).

Thus, UEM Edgenta Berhad has an ROCE of 3.4%. Ultimately, that's a low return and it under-performs the Construction industry average of 5.8%.

See our latest analysis for UEM Edgenta Berhad

In the above chart we have measured UEM Edgenta Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From UEM Edgenta Berhad's ROCE Trend?

We are a bit worried about the trend of returns on capital at UEM Edgenta Berhad. About five years ago, returns on capital were 9.1%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect UEM Edgenta Berhad to turn into a multi-bagger.

What We Can Learn From UEM Edgenta Berhad's ROCE

In summary, it's unfortunate that UEM Edgenta Berhad is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 54% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing, we've spotted 1 warning sign facing UEM Edgenta Berhad that you might find interesting.

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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.