Investors Could Be Concerned With Sycal Ventures Berhad's (KLSE:SYCAL) Returns On Capital

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Sycal Ventures Berhad (KLSE:SYCAL), the trends above didn't look too great.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Sycal Ventures Berhad, this is the formula:

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

0.021 = RM6.6m ÷ (RM473m - RM154m) (Based on the trailing twelve months to September 2021).

So, Sycal Ventures Berhad has an ROCE of 2.1%. Ultimately, that's a low return and it under-performs the Construction industry average of 5.8%.

Check out our latest analysis for Sycal Ventures 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 Sycal Ventures Berhad, check out these free graphs here.

What Can We Tell From Sycal Ventures Berhad's ROCE Trend?

There is reason to be cautious about Sycal Ventures Berhad, given the returns are trending downwards. About five years ago, returns on capital were 3.5%, 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. 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. If these trends continue, we wouldn't expect Sycal Ventures Berhad to turn into a multi-bagger.

The Bottom Line On Sycal Ventures Berhad's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Long term shareholders who've owned the stock over the last five years have experienced a 47% depreciation in their investment, so it appears the market might not like these trends either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

One more thing: We've identified 4 warning signs with Sycal Ventures Berhad (at least 1 which is a bit unpleasant) , and understanding these would certainly be useful.

While Sycal Ventures 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.