Rohas Tecnic Berhad (KLSE:ROHAS) May Have Issues Allocating Its Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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. 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)

0.027 = RM11m ÷ (RM662m - RM244m) (Based on the trailing twelve months to March 2024).

So, Rohas Tecnic Berhad has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 7.7%.

See our latest analysis for Rohas Tecnic Berhad

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

What Can We Tell From Rohas Tecnic Berhad's ROCE Trend?

In terms of Rohas Tecnic Berhad's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 6.7%, 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. 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 Rohas Tecnic Berhad to turn into a multi-bagger.

On a related note, Rohas Tecnic Berhad has decreased its current liabilities to 37% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

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. Long term shareholders who've owned the stock over the last five years have experienced a 37% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about Rohas Tecnic Berhad, we've spotted 3 warning signs, and 1 of them shouldn't be ignored.

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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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.

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