Some Investors May Be Worried About Hap Seng Consolidated Berhad's (KLSE:HAPSENG) Returns On Capital

When researching a stock for investment, what can tell us that the company is in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Hap Seng Consolidated Berhad (KLSE:HAPSENG), we've spotted some signs that it could be struggling, so let's investigate.

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. To calculate this metric for Hap Seng Consolidated Berhad, this is the formula:

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

0.054 = RM787m ÷ (RM19b - RM4.4b) (Based on the trailing twelve months to March 2024).

So, Hap Seng Consolidated Berhad has an ROCE of 5.4%. In absolute terms, that's a low return but it's around the Industrials industry average of 6.4%.

See our latest analysis for Hap Seng Consolidated Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hap Seng Consolidated Berhad's ROCE against it's prior returns. If you're interested in investigating Hap Seng Consolidated Berhad's past further, check out this free graph covering Hap Seng Consolidated Berhad's past earnings, revenue and cash flow.

What Does the ROCE Trend For Hap Seng Consolidated Berhad Tell Us?

In terms of Hap Seng Consolidated Berhad's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 6.9% that they were earning five years ago. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Hap Seng Consolidated Berhad becoming one if things continue as they have.

In Conclusion...

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Long term shareholders who've owned the stock over the last five years have experienced a 45% 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'd like to know about the risks facing Hap Seng Consolidated Berhad, we've discovered 2 warning signs that you should be aware of.

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.

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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.

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