Rohas Tecnic Berhad's (KLSE:ROHAS) Returns On Capital Not Reflecting Well On The Business

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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after we looked into Rohas Tecnic Berhad (KLSE:ROHAS), the trends above didn't look too great.

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. The formula for this calculation on Rohas Tecnic Berhad is:

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

0.023 = RM8.9m ÷ (RM642m - RM252m) (Based on the trailing twelve months to September 2022).

Thus, Rohas Tecnic Berhad has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Construction industry average of 5.3%.

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'd like to see what analysts are forecasting going forward, you should check out our free report for Rohas Tecnic Berhad.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Rohas Tecnic Berhad. About five 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. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Rohas Tecnic Berhad to turn into a multi-bagger.

The Bottom Line On Rohas Tecnic 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. Unsurprisingly then, the stock has dived 77% over the last five years, so investors are recognizing these changes and don't like the company's prospects. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to continue researching Rohas Tecnic Berhad, you might be interested to know about the 1 warning sign that our analysis has discovered.

While Rohas Tecnic Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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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.