Be Wary Of Berjaya Land Berhad (KLSE:BJLAND) And Its Returns On Capital

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after glancing at the trends within Berjaya Land Berhad (KLSE:BJLAND), we weren't too hopeful.

What is 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. The formula for this calculation on Berjaya Land Berhad is:

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

0.007 = RM71m ÷ (RM13b - RM3.1b) (Based on the trailing twelve months to March 2022).

Therefore, Berjaya Land Berhad has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Hospitality industry average of 7.3%.

See our latest analysis for Berjaya Land 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're interested in investigating Berjaya Land Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Berjaya Land Berhad's ROCE Trending?

We are a bit worried about the trend of returns on capital at Berjaya Land Berhad. To be more specific, the ROCE was 3.3% five years ago, but since then it has dropped noticeably. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Berjaya Land Berhad becoming one if things continue as they have.

The Key Takeaway

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors haven't taken kindly to these developments, since the stock has declined 58% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Like most companies, Berjaya Land Berhad does come with some risks, and we've found 1 warning sign that you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.