Malaysian Resources Corporation Berhad (KLSE:MRCB) Is Finding It Tricky To Allocate Its Capital

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. 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 Malaysian Resources Corporation Berhad (KLSE:MRCB), we've spotted some signs that it could be struggling, so let's investigate.

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. Analysts use this formula to calculate it for Malaysian Resources Corporation Berhad:

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

0.025 = RM163m ÷ (RM9.3b - RM2.8b) (Based on the trailing twelve months to September 2022).

Therefore, Malaysian Resources Corporation Berhad has an ROCE of 2.5%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 5.3%.

See 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 report on analyst forecasts for the company.

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

We are a bit worried about the trend of returns on capital at Malaysian Resources Corporation Berhad. To be more specific, the ROCE was 3.9% 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. 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 On Malaysian Resources Corporation Berhad's ROCE

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 65% 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.

One more thing to note, we've identified 2 warning signs with Malaysian Resources Corporation Berhad and understanding these should be part of your investment process.

While Malaysian Resources 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.

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

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.