Stock Analysis

Kerjaya Prospek Group Berhad (KLSE:KERJAYA) Could Be At Risk Of Shrinking As A Company

KLSE:KERJAYA
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When researching a stock for investment, what can tell us that the company is 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. And from a first read, things don't look too good at Kerjaya Prospek Group Berhad (KLSE:KERJAYA), so let's see why.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Kerjaya Prospek Group Berhad, this is the formula:

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

0.13 = RM150m ÷ (RM1.5b - RM286m) (Based on the trailing twelve months to June 2023).

Thus, Kerjaya Prospek Group Berhad has an ROCE of 13%. In absolute terms, that's a satisfactory return, but compared to the Construction industry average of 6.0% it's much better.

View our latest analysis for Kerjaya Prospek Group Berhad

roce
KLSE:KERJAYA Return on Capital Employed November 8th 2023

In the above chart we have measured Kerjaya Prospek Group Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Kerjaya Prospek Group Berhad here for free.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Kerjaya Prospek Group Berhad. To be more specific, the ROCE was 17% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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. If these trends continue, we wouldn't expect Kerjaya Prospek Group Berhad to turn into a multi-bagger.

Our Take On Kerjaya Prospek Group Berhad's ROCE

In summary, it's unfortunate that Kerjaya Prospek Group Berhad is generating lower returns from the same amount of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 49% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Kerjaya Prospek Group Berhad does have some risks though, and we've spotted 1 warning sign for Kerjaya Prospek Group Berhad that you might be interested in.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

Valuation is complex, but we're helping make it simple.

Find out whether Kerjaya Prospek Group 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.