Sycal Ventures Berhad's (KLSE:SYCAL) 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. 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 to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. In light of that, from a first glance at Sycal Ventures Berhad (KLSE:SYCAL), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.02 = RM6.6m ÷ (RM503m - RM170m) (Based on the trailing twelve months to December 2020).

So, Sycal Ventures Berhad has an ROCE of 2.0%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 4.8%.

Check out our latest analysis for Sycal Ventures Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Sycal Ventures Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Sycal Ventures Berhad, check out these free graphs here.

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at Sycal Ventures Berhad. Unfortunately the returns on capital have diminished from the 7.7% that they were earning five years ago. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Sycal Ventures Berhad becoming one if things continue as they have.

The Key Takeaway

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. 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.

Sycal Ventures Berhad does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those can't be ignored...

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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