Protasco Berhad (KLSE:PRTASCO) Is Finding It Tricky To Allocate Its Capital

When researching a stock for investment, what can tell us that the company is in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. On that note, looking into Protasco Berhad (KLSE:PRTASCO), we weren't too upbeat about how things were going.

What is 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. The formula for this calculation on Protasco Berhad is:

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

0.12 = RM61m ÷ (RM958m - RM469m) (Based on the trailing twelve months to December 2021).

So, Protasco Berhad has an ROCE of 12%. On its own, that's a standard return, however it's much better than the 5.3% generated by the Construction industry.

See our latest analysis for Protasco Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Protasco Berhad's ROCE against it's prior returns. If you're interested in investigating Protasco Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Protasco Berhad's ROCE Trending?

In terms of Protasco Berhad's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 16% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Protasco Berhad to turn into a multi-bagger.

On a side note, Protasco Berhad has done well to pay down its current liabilities to 49% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money. Either way, they're still at a pretty high level, so we'd like to see them fall further if possible.

The Bottom Line On Protasco Berhad's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. This could explain why the stock has sunk a total of 73% in the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we found 2 warning signs for Protasco Berhad (1 is potentially serious) you should be aware of.

While Protasco 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. 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.