To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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 the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Tien Wah Press Holdings Berhad (KLSE:TIENWAH), we've spotted some signs that it could be struggling, so let's investigate.
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. Analysts use this formula to calculate it for Tien Wah Press Holdings Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.03 = RM12m ÷ (RM496m - RM95m) (Based on the trailing twelve months to June 2021).
Thus, Tien Wah Press Holdings Berhad has an ROCE of 3.1%. Ultimately, that's a low return and it under-performs the Commercial Services industry average of 4.5%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for Tien Wah Press Holdings Berhad's ROCE against it's prior returns. If you'd like to look at how Tien Wah Press Holdings Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
So How Is Tien Wah Press Holdings Berhad's ROCE Trending?
In terms of Tien Wah Press Holdings Berhad's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 11% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 Tien Wah Press Holdings Berhad to turn into a multi-bagger.
The Bottom Line
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. And long term shareholders have watched their investments stay flat over the last five years. 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 Tien Wah Press Holdings Berhad (at least 1 which makes us a bit uncomfortable) , and understanding these would certainly be useful.
If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.
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