GDB Holdings Berhad (KLSE:GDB) Might Be Having Difficulty Using Its Capital Effectively

What are the early trends we should look for to identify a stock that could multiply in value over the long term? Firstly, we'd want to identify a growing return on capital employed (ROCE) and then alongside that, an ever-increasing base of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at GDB Holdings Berhad (KLSE:GDB) and its ROCE trend, we weren't exactly thrilled.

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. The formula for this calculation on GDB Holdings Berhad is:

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

0.06 = RM9.8m ÷ (RM336m - RM174m) (Based on the trailing twelve months to March 2023).

So, GDB Holdings Berhad has an ROCE of 6.0%. On its own, that's a low figure but it's around the 5.4% average generated by the Construction industry.

Check out our latest analysis for GDB Holdings Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for GDB Holdings Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of GDB Holdings Berhad, check out these free graphs here.

The Trend Of ROCE

In terms of GDB Holdings Berhad's historical ROCE movements, the trend isn't fantastic. Around five years ago the returns on capital were 55%, but since then they've fallen to 6.0%. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, GDB Holdings Berhad has done well to pay down its current liabilities to 52% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Keep in mind 52% is still pretty high, so those risks are still somewhat prevalent.

Our Take On GDB Holdings Berhad's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for GDB Holdings Berhad have fallen, meanwhile the business is employing more capital than it was five years ago. Long term shareholders who've owned the stock over the last five years have experienced a 17% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know more about GDB Holdings Berhad, we've spotted 4 warning signs, and 1 of them can't be ignored.

While GDB 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.