Gadang Holdings Berhad (KLSE:GADANG) Could Be Struggling To Allocate Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. And from a first read, things don't look too good at Gadang Holdings Berhad (KLSE:GADANG), so let's see why.

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What Is 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 Gadang Holdings Berhad, this is the formula:

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

0.015 = RM14m ÷ (RM1.5b - RM498m) (Based on the trailing twelve months to November 2024).

So, Gadang Holdings Berhad has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Construction industry average of 10.0%.

View our latest analysis for Gadang Holdings Berhad

Above you can see how the current ROCE for Gadang Holdings Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Gadang Holdings Berhad .

What Can We Tell From Gadang Holdings Berhad's ROCE Trend?

In terms of Gadang Holdings Berhad's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 5.0%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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. If these trends continue, we wouldn't expect Gadang Holdings Berhad to turn into a multi-bagger.

The Bottom Line On Gadang Holdings Berhad's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Long term shareholders who've owned the stock over the last five years have experienced a 32% 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.

If you want to continue researching Gadang Holdings Berhad, you might be interested to know about the 2 warning signs that our analysis has discovered.

While Gadang Holdings Berhad isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.