Y&G Corporation Bhd (KLSE:Y&G) Could Be At Risk Of Shrinking As A Company

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. When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. In light of that, from a first glance at Y&G Corporation Bhd (KLSE:Y&G), we've spotted some signs that it could be struggling, so let's investigate.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on Y&G Corporation Bhd is:

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

0.027 = RM9.2m ÷ (RM387m - RM46m) (Based on the trailing twelve months to June 2021).

So, Y&G Corporation Bhd has an ROCE of 2.7%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 6.0%.

Check out our latest analysis for Y&G Corporation Bhd

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 Y&G Corporation Bhd, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

In terms of Y&G Corporation Bhd's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 6.4% 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. If these trends continue, we wouldn't expect Y&G Corporation Bhd to turn into a multi-bagger.

The Bottom Line

In summary, it's unfortunate that Y&G Corporation Bhd is generating lower returns from the same amount of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 48% return over the last five years, so investors appear very optimistic. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

On a final note, we found 3 warning signs for Y&G Corporation Bhd (1 shouldn't be ignored) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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.

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