SCC Holdings Berhad (KLSE:SCC) Has Some Difficulty Using Its Capital Effectively

What underlying fundamental trends can indicate that a company might be in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. On that note, looking into SCC Holdings Berhad (KLSE:SCC), we weren't too upbeat about how things were going.

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 SCC Holdings Berhad is:

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

0.048 = RM2.3m ÷ (RM52m - RM5.4m) (Based on the trailing twelve months to June 2023).

Therefore, SCC Holdings Berhad has an ROCE of 4.8%. In absolute terms, that's a low return and it also under-performs the Trade Distributors industry average of 6.2%.

View our latest analysis for SCC Holdings Berhad

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of SCC Holdings Berhad, check out these free graphs here.

How Are Returns Trending?

There is reason to be cautious about SCC Holdings Berhad, given the returns are trending downwards. About five years ago, returns on capital were 19%, 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. 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 SCC Holdings Berhad to turn into a multi-bagger.

In Conclusion...

In summary, it's unfortunate that SCC Holdings Berhad is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 28% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

SCC Holdings Berhad does have some risks, we noticed 6 warning signs (and 5 which don't sit too well with us) we think you should know about.

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.