Rohas Tecnic Berhad (KLSE:ROHAS) Could Be Struggling To Allocate 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. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. Having said that, after a brief look, Rohas Tecnic Berhad (KLSE:ROHAS) we aren't filled with optimism, but let's investigate further.

Understanding 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. Analysts use this formula to calculate it for Rohas Tecnic Berhad:

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

0.093 = RM35m ÷ (RM661m - RM281m) (Based on the trailing twelve months to December 2022).

Therefore, Rohas Tecnic Berhad has an ROCE of 9.3%. On its own that's a low return, but compared to the average of 5.0% generated by the Construction industry, it's much better.

Check out our latest analysis for Rohas Tecnic Berhad

In the above chart we have measured Rohas Tecnic Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Rohas Tecnic Berhad here for free.

What Does the ROCE Trend For Rohas Tecnic Berhad Tell Us?

We are a bit worried about the trend of returns on capital at Rohas Tecnic Berhad. To be more specific, the ROCE was 12% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Rohas Tecnic Berhad becoming one if things continue as they have.

Another thing to note, Rohas Tecnic Berhad has a high ratio of current liabilities to total assets of 42%. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

Our Take On Rohas Tecnic Berhad's ROCE

In summary, it's unfortunate that Rohas Tecnic Berhad is generating lower returns from the same amount of capital. We expect this has contributed to the stock plummeting 73% during the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a separate note, we've found 1 warning sign for Rohas Tecnic Berhad you'll probably want to know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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.