Be Wary Of Emico Holdings Berhad (KLSE:EMICO) And Its Returns On Capital

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. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. In light of that, from a first glance at Emico Holdings Berhad (KLSE:EMICO), 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 Emico Holdings Berhad:

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

0.006 = RM371k ÷ (RM76m - RM15m) (Based on the trailing twelve months to September 2021).

So, Emico Holdings Berhad has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 12%.

See our latest analysis for Emico Holdings 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 Emico Holdings Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Emico Holdings Berhad Tell Us?

In terms of Emico Holdings Berhad's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 19%, 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. 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 Emico Holdings Berhad becoming one if things continue as they have.

What We Can Learn From Emico Holdings Berhad's ROCE

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. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 57% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

Emico Holdings Berhad does come with some risks though, we found 4 warning signs in our investment analysis, and 2 of those are a bit concerning...

While Emico Holdings Berhad isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.