Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into Berjaya Assets Berhad (KLSE:BJASSET), the trends above didn't look too great.
Understanding 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. Analysts use this formula to calculate it for Berjaya Assets Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0096 = RM30m ÷ (RM3.4b - RM224m) (Based on the trailing twelve months to March 2021).
So, Berjaya Assets Berhad has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 6.2%.
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 Berjaya Assets Berhad, check out these free graphs here.
The Trend Of ROCE
There is reason to be cautious about Berjaya Assets Berhad, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 3.1% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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 Berjaya Assets Berhad to turn into a multi-bagger.
What We Can Learn From Berjaya Assets Berhad's ROCE
In summary, it's unfortunate that Berjaya Assets Berhad is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 31% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
If you want to know some of the risks facing Berjaya Assets Berhad we've found 2 warning signs (1 is a bit concerning!) that you should be aware of before investing here.
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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