Some Investors May Be Worried About Warisan TC Holdings Berhad's (KLSE:WARISAN) Returns On Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. On that note, looking into Warisan TC Holdings Berhad (KLSE:WARISAN), we weren't too upbeat about how things were going.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Warisan TC Holdings Berhad:

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

0.016 = RM4.9m ÷ (RM734m - RM438m) (Based on the trailing twelve months to March 2024).

So, Warisan TC Holdings Berhad has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Industrials industry average of 6.6%.

See our latest analysis for Warisan TC Holdings Berhad

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

The Trend Of ROCE

We are a bit anxious about the trends of ROCE at Warisan TC Holdings Berhad. Unfortunately, returns have declined substantially over the last five years to the 1.6% we see today. On top of that, the business is utilizing 22% less capital within its operations. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

On a side note, Warisan TC Holdings Berhad's current liabilities are still rather high at 60% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Warisan TC Holdings Berhad's ROCE

In summary, it's unfortunate that Warisan TC Holdings Berhad is shrinking its capital base and also generating lower returns. It should come as no surprise then that the stock has fallen 45% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

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

While Warisan TC Holdings 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.