These Return Metrics Don't Make Techbase Industries Berhad (KLSE:TECHBASE) Look Too Strong

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. 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 reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. And from a first read, things don't look too good at Techbase Industries Berhad (KLSE:TECHBASE), so let's see why.

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. To calculate this metric for Techbase Industries Berhad, this is the formula:

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

0.0073 = RM2.6m ÷ (RM415m - RM56m) (Based on the trailing twelve months to October 2023).

Thus, Techbase Industries Berhad has an ROCE of 0.7%. Ultimately, that's a low return and it under-performs the Luxury industry average of 11%.

Check out our latest analysis for Techbase Industries 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'd like to look at how Techbase Industries Berhad has performed in the past in other metrics, you can view this free graph of Techbase Industries Berhad's past earnings, revenue and cash flow.

What Can We Tell From Techbase Industries Berhad's ROCE Trend?

There is reason to be cautious about Techbase Industries Berhad, given the returns are trending downwards. About five years ago, returns on capital were 4.4%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Techbase Industries Berhad to turn into a multi-bagger.

The Key Takeaway

In summary, it's unfortunate that Techbase Industries Berhad is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 49% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Techbase Industries Berhad does have some risks though, and we've spotted 3 warning signs for Techbase Industries Berhad that you might be interested in.

While Techbase Industries 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.