Here's What We Make Of Kim Hin Industry Berhad's (KLSE:KIMHIN) Returns On Capital

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at Kim Hin Industry Berhad (KLSE:KIMHIN), we've spotted some signs that it could be struggling, so let's investigate.

Understanding 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. Analysts use this formula to calculate it for Kim Hin Industry Berhad:

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

0.0043 = RM1.9m ÷ (RM555m - RM109m) (Based on the trailing twelve months to December 2020).

Thus, Kim Hin Industry Berhad has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Building industry average of 6.4%.

Check out our latest analysis for Kim Hin Industry 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 want to delve into the historical earnings, revenue and cash flow of Kim Hin Industry Berhad, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

In terms of Kim Hin Industry Berhad's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 6.4%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Kim Hin Industry Berhad becoming one if things continue as they have.

Our Take On Kim Hin Industry Berhad's ROCE

In summary, it's unfortunate that Kim Hin Industry Berhad is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 57% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Kim Hin Industry Berhad (including 1 which makes us a bit uncomfortable) .

While Kim Hin Industry 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. 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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