Some Investors May Be Worried About Magnum Berhad's (KLSE:MAGNUM) Returns On Capital

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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. So after we looked into Magnum Berhad (KLSE:MAGNUM), the trends above didn't look too great.

Understanding Return On Capital Employed (ROCE)

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Magnum Berhad, this is the formula:

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

0.062 = RM197m ÷ (RM3.6b - RM396m) (Based on the trailing twelve months to December 2020).

Thus, Magnum Berhad has an ROCE of 6.2%. In absolute terms, that's a low return, but it's much better than the Hospitality industry average of 3.7%.

See our latest analysis for Magnum Berhad

Above you can see how the current ROCE for Magnum Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Magnum Berhad here for free.

The Trend Of ROCE

There is reason to be cautious about Magnum Berhad, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 11% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 Magnum Berhad becoming one if things continue as they have.

The Bottom Line On Magnum Berhad's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors must expect better things on the horizon though because the stock has risen 18% in the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Magnum Berhad does have some risks though, and we've spotted 2 warning signs for Magnum Berhad that you might be interested in.

While Magnum 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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