Y&G Corporation Bhd (KLSE:Y&G) May Have Issues Allocating Its Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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 combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after we looked into Y&G Corporation Bhd (KLSE:Y&G), the trends above didn't look too great.

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. To calculate this metric for Y&G Corporation Bhd, this is the formula:

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

0.032 = RM11m ÷ (RM378m - RM26m) (Based on the trailing twelve months to June 2023).

Thus, Y&G Corporation Bhd has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Construction industry average of 6.0%.

View 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.

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Y&G Corporation Bhd. Unfortunately the returns on capital have diminished from the 4.6% 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. If these trends continue, we wouldn't expect Y&G Corporation Bhd to turn into a multi-bagger.

What We Can Learn From Y&G Corporation Bhd's ROCE

In summary, it's unfortunate that Y&G Corporation Bhd is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 24% 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.

If you want to know some of the risks facing Y&G Corporation Bhd we've found 2 warning signs (1 is potentially serious!) that you should be aware of before investing here.

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.

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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.