Returns On Capital At Rohas Tecnic Berhad (KLSE:ROHAS) Paint A Concerning Picture

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within Rohas Tecnic Berhad (KLSE:ROHAS), we weren't too hopeful.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Rohas Tecnic Berhad is:

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

0.052 = RM20m ÷ (RM586m - RM204m) (Based on the trailing twelve months to September 2020).

Thus, Rohas Tecnic Berhad has an ROCE of 5.2%. Even though it's in line with the industry average of 5.2%, it's still a low return by itself.

Check out our latest analysis for Rohas Tecnic Berhad

Above you can see how the current ROCE for Rohas Tecnic 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 Does the ROCE Trend For Rohas Tecnic Berhad Tell Us?

There is reason to be cautious about Rohas Tecnic Berhad, given the returns are trending downwards. About three years ago, returns on capital were 13%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Rohas Tecnic Berhad to turn into a multi-bagger.

On a related note, Rohas Tecnic Berhad has decreased its current liabilities to 35% of total assets. So we could link some of this to the decrease in ROCE. 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.

The Bottom Line On Rohas Tecnic Berhad's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. This could explain why the stock has sunk a total of 75% in the last three years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Rohas Tecnic Berhad does have some risks though, and we've spotted 2 warning signs for Rohas Tecnic Berhad that you might be interested in.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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