Capital Allocation Trends At SCC Holdings Berhad (KLSE:SCC) Aren't Ideal

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at SCC Holdings Berhad (KLSE:SCC), so let's see why.

Return On Capital Employed (ROCE): What Is It?

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 SCC Holdings Berhad:

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

0.03 = RM1.4m ÷ (RM54m - RM6.2m) (Based on the trailing twelve months to June 2024).

Thus, SCC Holdings Berhad has an ROCE of 3.0%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 7.8%.

See our latest analysis for SCC Holdings Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for SCC Holdings Berhad's ROCE against it's prior returns. If you'd like to look at how SCC Holdings Berhad has performed in the past in other metrics, you can view this free graph of SCC Holdings Berhad's past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of SCC Holdings Berhad's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 17% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on SCC Holdings Berhad becoming one if things continue as they have.

What We Can Learn From SCC Holdings 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. Investors haven't taken kindly to these developments, since the stock has declined 44% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to continue researching SCC Holdings Berhad, you might be interested to know about the 3 warning signs that our analysis has discovered.

While SCC Holdings 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.