Stock Analysis

Gamuda Berhad (KLSE:GAMUDA) May Have Issues Allocating Its Capital

KLSE:GAMUDA
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Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we'll see a declining return on capital employed (ROCE) and a declining 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 Gamuda Berhad (KLSE:GAMUDA), the trends above didn't look too great.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Gamuda Berhad is:

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

0.031 = RM447m ÷ (RM19b - RM4.8b) (Based on the trailing twelve months to January 2023).

So, Gamuda Berhad has an ROCE of 3.1%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 4.9%.

See our latest analysis for Gamuda Berhad

roce
KLSE:GAMUDA Return on Capital Employed April 3rd 2023

In the above chart we have measured Gamuda 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 Gamuda Berhad here for free.

What Does the ROCE Trend For Gamuda Berhad Tell Us?

In terms of Gamuda Berhad's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 5.3%, 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 Gamuda Berhad to turn into a multi-bagger.

Our Take On Gamuda Berhad's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Despite the concerning underlying trends, the stock has actually gained 0.5% over the last five years, so it might be that the investors are expecting the trends to reverse. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

One more thing to note, we've identified 2 warning signs with Gamuda Berhad and understanding these should be part of your investment process.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

Valuation is complex, but we're helping make it simple.

Find out whether Gamuda Berhad is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

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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.