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- KLSE:CAMRES
What CAM Resources Berhad's (KLSE:CAMRES) Returns On Capital Can Tell Us
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. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at CAM Resources Berhad (KLSE:CAMRES), we've spotted some signs that it could be struggling, so let's investigate.
Understanding Return On Capital Employed (ROCE)
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. To calculate this metric for CAM Resources Berhad, this is the formula:
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).
So, 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 12%.
See our latest analysis for CAM Resources Berhad
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're interested in investigating CAM Resources Berhad's past further, check out this free graph of past earnings, revenue and cash flow.
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. To be more specific, the ROCE was 9.2% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. 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.
The Key Takeaway
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. Yet despite these concerning fundamentals, the stock has performed strongly with a 44% 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 CAM Resources Berhad (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.
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This article by Simply Wall St is general in nature. 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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About KLSE:CAMRES
CAM Resources Berhad
An investment holding company, engages in the manufacture and trading of household products, palm oil milling, and renewable energy businesses in Malaysia, rest of Asia, and the United States.
Flawless balance sheet slight.