Returns On Capital At Latitude Tree Holdings Berhad (KLSE:LATITUD) Paint A Concerning Picture

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within Latitude Tree Holdings Berhad (KLSE:LATITUD), we weren't too hopeful.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for Latitude Tree Holdings Berhad:

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

0.074 = RM47m ÷ (RM866m - RM236m) (Based on the trailing twelve months to December 2020).

Thus, Latitude Tree Holdings Berhad has an ROCE of 7.4%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 9.9%.

View our latest analysis for Latitude Tree Holdings Berhad

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

The Trend Of ROCE

In terms of Latitude Tree Holdings Berhad's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 16% 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. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Latitude Tree Holdings Berhad becoming one if things continue as they have.

What We Can Learn From Latitude Tree 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. Long term shareholders who've owned the stock over the last five years have experienced a 18% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we found 3 warning signs for Latitude Tree Holdings Berhad (1 is a bit concerning) you should be aware of.

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