Ni Hsin Resources Berhad (KLSE:NIHSIN) Will Be Hoping To Turn Its Returns On Capital Around

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Firstly, we'll want to see a proven return on capital employed (ROCE) that is increasing, and secondly, an expanding base of capital employed. Put simply, these types of businesses are compounding machines, meaning they are continually reinvesting their earnings at ever-higher rates of return. Having said that, from a first glance at Ni Hsin Resources Berhad (KLSE:NIHSIN) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. The formula for this calculation on Ni Hsin Resources Berhad is:

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

0.022 = RM2.0m ÷ (RM98m - RM6.4m) (Based on the trailing twelve months to December 2020).

Therefore, Ni Hsin Resources Berhad has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 9.9%.

View our latest analysis for Ni Hsin 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 want to delve into the historical earnings, revenue and cash flow of Ni Hsin Resources Berhad, check out these free graphs here.

The Trend Of ROCE

On the surface, the trend of ROCE at Ni Hsin Resources Berhad doesn't inspire confidence. To be more specific, ROCE has fallen from 5.1% over the last five years. And considering revenue has dropped while employing more capital, we'd be cautious. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

The Bottom Line

From the above analysis, we find it rather worrisome that returns on capital and sales for Ni Hsin Resources Berhad have fallen, meanwhile the business is employing more capital than it was five years ago. Long term shareholders who've owned the stock over the last five years have experienced a 50% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing, we've spotted 3 warning signs facing Ni Hsin Resources Berhad that you might find interesting.

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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