Returns On Capital At CAM Resources Berhad (KLSE:CAMRES) Paint A Concerning Picture

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. On that note, looking into CAM Resources Berhad (KLSE:CAMRES), we weren't too upbeat about how things were going.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on CAM Resources Berhad is:

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

0.062 = RM8.5m ÷ (RM180m - RM43m) (Based on the trailing twelve months to September 2020).

Therefore, CAM Resources Berhad has an ROCE of 6.2%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 11%.

View our latest analysis for CAM Resources Berhad

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

What Can We Tell From CAM Resources Berhad's ROCE Trend?

We are a bit worried about the trend of returns on capital at CAM Resources Berhad. About five years ago, returns on capital were 9.2%, however they're now substantially lower than that as we saw above. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on CAM Resources Berhad becoming one if things continue as they have.

In Conclusion...

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. In spite of that, the stock has delivered a 16% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

On a final note, we found 3 warning signs for CAM Resources Berhad (1 is a bit unpleasant) you should be aware of.

While CAM Resources 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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