Returns On Capital At Genting Berhad (KLSE:GENTING) Paint A Concerning Picture

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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 combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after glancing at the trends within Genting Berhad (KLSE:GENTING), we weren't too hopeful.

Return On Capital Employed (ROCE): What is it?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Genting Berhad:

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

0.0088 = RM823m ÷ (RM102b - RM8.6b) (Based on the trailing twelve months to December 2021).

Therefore, Genting Berhad has an ROCE of 0.9%. Ultimately, that's a low return and it under-performs the Hospitality industry average of 5.6%.

View our latest analysis for Genting Berhad

In the above chart we have measured Genting Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Genting Berhad here for free.

What Can We Tell From Genting Berhad's ROCE Trend?

We are a bit worried about the trend of returns on capital at Genting Berhad. About five years ago, returns on capital were 4.6%, however they're now substantially lower than that as we saw above. 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 Genting Berhad becoming one if things continue as they have.

In Conclusion...

In summary, it's unfortunate that Genting Berhad is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 44% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a separate note, we've found 1 warning sign for Genting Berhad you'll probably want to know about.

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.