Is This A Sign of Things To Come At IJM Corporation Berhad (KLSE:IJM)?

What underlying fundamental trends can indicate that a company might be 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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into IJM Corporation Berhad (KLSE:IJM), the trends above didn't look too great.

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 IJM Corporation Berhad is:

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

0.032 = RM578m ÷ (RM24b - RM5.8b) (Based on the trailing twelve months to September 2020).

Therefore, IJM Corporation Berhad has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Construction industry average of 5.2%.

Check out our latest analysis for IJM Corporation Berhad

Above you can see how the current ROCE for IJM Corporation Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Can We Tell From IJM Corporation Berhad's ROCE Trend?

There is reason to be cautious about IJM Corporation Berhad, given the returns are trending downwards. To be more specific, the ROCE was 7.3% five years ago, but since then it has dropped noticeably. 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. If these trends continue, we wouldn't expect IJM Corporation Berhad to turn into a multi-bagger.

What We Can Learn From IJM Corporation Berhad's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 43% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a separate note, we've found 2 warning signs for IJM Corporation Berhad you'll probably want to know about.

While IJM Corporation 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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