Is Genting Berhad (KLSE:GENTING) Shrinking?

What underlying fundamental trends can indicate that a company might be in decline? 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 indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. In light of that, from a first glance at Genting Berhad (KLSE:GENTING), we've spotted some signs that it could be struggling, so let's investigate.

What is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Genting Berhad, this is the formula:

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

0.007 = RM655m ÷ (RM102b - RM8.0b) (Based on the trailing twelve months to September 2020).

Thus, Genting 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 3.3%.

View our latest analysis for Genting Berhad

Above you can see how the current ROCE for Genting Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

So How Is Genting Berhad's ROCE Trending?

We are a bit worried about the trend of returns on capital at Genting Berhad. Unfortunately the returns on capital have diminished from the 4.2% 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Genting Berhad becoming one if things continue as they have.

The Bottom Line

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. It should come as no surprise then that the stock has fallen 35% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about Genting Berhad, we've spotted 3 warning signs, and 1 of them shouldn't be ignored.

While Genting Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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