Investors Could Be Concerned With GDB Holdings Berhad's (KLSE:GDB) Returns On Capital

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. In light of that, when we looked at GDB Holdings Berhad (KLSE:GDB) and its ROCE trend, we weren't exactly thrilled.

Our free stock report includes 3 warning signs investors should be aware of before investing in GDB Holdings Berhad. Read for free now.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its 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)

0.17 = RM33m ÷ (RM373m - RM177m) (Based on the trailing twelve months to December 2024).

Thus, GDB Holdings Berhad has an ROCE of 17%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 9.4% it's much better.

Check out our latest analysis for GDB Holdings Berhad

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how GDB Holdings Berhad has performed in the past in other metrics, you can view this free graph of GDB Holdings Berhad's past earnings, revenue and cash flow.

How Are Returns Trending?

On the surface, the trend of ROCE at GDB Holdings Berhad doesn't inspire confidence. To be more specific, ROCE has fallen from 27% over the last five years. 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 separate but related note, it's important to know that GDB Holdings Berhad has a current liabilities to total assets ratio of 47%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From 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. It should come as no surprise then that the stock has fallen 13% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for GDB Holdings Berhad (of which 2 are a bit unpleasant!) that you should know about.

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.