Stock Analysis

Gamuda Berhad (KLSE:GAMUDA) Will Be Looking To Turn Around Its Returns

KLSE:GAMUDA
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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. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after glancing at the trends within Gamuda Berhad (KLSE:GAMUDA), we weren't too hopeful.

What Is Return On Capital Employed (ROCE)?

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. Analysts use this formula to calculate it for Gamuda Berhad:

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

0.031 = RM462m ÷ (RM20b - RM4.7b) (Based on the trailing twelve months to April 2023).

Therefore, Gamuda Berhad has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Construction industry average of 4.9%.

Check out our latest analysis for Gamuda Berhad

roce
KLSE:GAMUDA Return on Capital Employed August 8th 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're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

The Trend Of ROCE

There is reason to be cautious about Gamuda Berhad, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 5.4% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Gamuda Berhad becoming one if things continue as they have.

The Bottom Line

In summary, it's unfortunate that Gamuda Berhad is generating lower returns from the same amount of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 51% return over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

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

While Gamuda 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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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.