Some Investors May Be Worried About Rhong Khen International Berhad's (KLSE:RKI) Returns On Capital

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. Basically the company is earning less on its investments and it is also reducing its total assets. So after we looked into Rhong Khen International Berhad (KLSE:RKI), the trends above didn't look too great.

What Is Return On Capital Employed (ROCE)?

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. To calculate this metric for Rhong Khen International Berhad, this is the formula:

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

0.075 = RM51m ÷ (RM948m - RM258m) (Based on the trailing twelve months to June 2022).

So, Rhong Khen International Berhad has an ROCE of 7.5%. In absolute terms, that's a low return and it also under-performs the Consumer Durables industry average of 11%.

Check out our latest analysis for Rhong Khen International Berhad

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

How Are Returns Trending?

There is reason to be cautious about Rhong Khen International Berhad, given the returns are trending downwards. About five years ago, returns on capital were 14%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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. If these trends continue, we wouldn't expect Rhong Khen International Berhad to turn into a multi-bagger.

What We Can Learn From Rhong Khen International Berhad's ROCE

In summary, it's unfortunate that Rhong Khen International Berhad is generating lower returns from the same amount of capital. Long term shareholders who've owned the stock over the last five years have experienced a 28% 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 final note, you should learn about the 3 warning signs we've spotted with Rhong Khen International Berhad (including 1 which is potentially serious) .

While Rhong Khen International 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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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.