Returns On Capital At Engtex Group Berhad (KLSE:ENGTEX) Paint A Concerning Picture

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within Engtex Group Berhad (KLSE:ENGTEX), we weren't too hopeful.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Engtex Group Berhad, this is the formula:

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

0.034 = RM30m ÷ (RM1.5b - RM666m) (Based on the trailing twelve months to September 2023).

Therefore, Engtex Group Berhad has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 5.6%.

Check out our latest analysis for Engtex Group Berhad

In the above chart we have measured Engtex Group Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Engtex Group Berhad here for free.

The Trend Of ROCE

There is reason to be cautious about Engtex Group Berhad, given the returns are trending downwards. About five years ago, returns on capital were 9.3%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Engtex Group Berhad to turn into a multi-bagger.

On a separate but related note, it's important to know that Engtex Group Berhad has a current liabilities to total assets ratio of 43%, which we'd consider pretty high. 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. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

The Bottom Line

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. And long term shareholders have watched their investments stay flat over the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Engtex Group Berhad does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those can't be ignored...

While Engtex Group 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. 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.