Malaysian Resources Corporation Berhad (KLSE:MRCB) Could Be At Risk Of Shrinking As A Company

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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at Malaysian Resources Corporation Berhad (KLSE:MRCB), we've spotted some signs that it could be struggling, so let's investigate.

Return On Capital Employed (ROCE): What Is It?

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 Malaysian Resources Corporation Berhad is:

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

0.004 = RM27m ÷ (RM8.8b - RM2.1b) (Based on the trailing twelve months to March 2024).

So, Malaysian Resources Corporation Berhad has an ROCE of 0.4%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 9.4%.

Check out our latest analysis for Malaysian Resources Corporation Berhad

Above you can see how the current ROCE for Malaysian Resources 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 analyst report for Malaysian Resources Corporation Berhad .

What Does the ROCE Trend For Malaysian Resources Corporation Berhad Tell Us?

There is reason to be cautious about Malaysian Resources Corporation Berhad, given the returns are trending downwards. About five years ago, returns on capital were 1.4%, however they're now substantially lower than that as we saw above. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Malaysian Resources Corporation Berhad becoming one if things continue as they have.

The Bottom Line

In summary, it's unfortunate that Malaysian Resources Corporation Berhad is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 25% 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.

Malaysian Resources Corporation Berhad does come with some risks though, we found 2 warning signs in our investment analysis, and 1 of those can't be ignored...

While Malaysian Resources Corporation Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com