What underlying fundamental trends can indicate that a company might be in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. Having said that, after a brief look, Avillion Berhad (KLSE:AVI) we aren't filled with optimism, but let's investigate further.
What Is Return On Capital Employed (ROCE)?
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. The formula for this calculation on Avillion Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.014 = RM4.3m ÷ (RM358m - RM57m) (Based on the trailing twelve months to September 2022).
So, Avillion Berhad has an ROCE of 1.4%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 4.7%.
Check out our latest analysis for Avillion Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Avillion Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Avillion Berhad, check out these free graphs here.
What Does the ROCE Trend For Avillion Berhad Tell Us?
In terms of Avillion Berhad's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 3.4% 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. 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 Avillion Berhad to turn into a multi-bagger.
Our Take On Avillion Berhad's ROCE
In summary, it's unfortunate that Avillion Berhad is generating lower returns from the same amount of capital. We expect this has contributed to the stock plummeting 71% during the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
If you'd like to know about the risks facing Avillion Berhad, we've discovered 2 warning signs that you should be aware of.
For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.
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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.
About KLSE:AVI
Avillion Berhad
An investment holding company, engages in the hotel, property, and travel businesses in Malaysia, Hong Kong, Singapore, and Indonesia.
Excellent balance sheet and good value.
