If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within SHH Resources Holdings Berhad (KLSE:SHH), we weren't too hopeful.
Return On Capital Employed (ROCE): What is it?
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 SHH Resources Holdings Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.041 = RM3.1m ÷ (RM96m - RM21m) (Based on the trailing twelve months to September 2021).
So, SHH Resources Holdings Berhad has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Consumer Durables industry average of 11%.
Historical performance is a great place to start when researching a stock so above you can see the gauge for SHH Resources Holdings Berhad's ROCE against it's prior returns. If you're interested in investigating SHH Resources Holdings Berhad's past further, check out this free graph of past earnings, revenue and cash flow.
So How Is SHH Resources Holdings Berhad's ROCE Trending?
There is reason to be cautious about SHH Resources Holdings Berhad, given the returns are trending downwards. To be more specific, the ROCE was 9.6% 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 SHH Resources Holdings Berhad becoming one if things continue as they have.
The Bottom Line
In summary, it's unfortunate that SHH Resources Holdings Berhad is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 35% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
If you'd like to know more about SHH Resources Holdings Berhad, we've spotted 3 warning signs, and 2 of them shouldn't be ignored.
While SHH Resources 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.