Hengyuan Refining Company Berhad (KLSE:HENGYUAN) Will Be Hoping To Turn Its Returns On Capital Around

What underlying fundamental trends can indicate that a company might be in decline? 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. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Hengyuan Refining Company Berhad (KLSE:HENGYUAN), we weren't too hopeful.

Understanding 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. To calculate this metric for Hengyuan Refining Company Berhad, this is the formula:

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

0.041 = RM106m ÷ (RM5.5b - RM2.9b) (Based on the trailing twelve months to December 2021).

Thus, Hengyuan Refining Company Berhad has an ROCE of 4.1%. Ultimately, that's a low return and it under-performs the Oil and Gas industry average of 13%.

View our latest analysis for Hengyuan Refining Company Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hengyuan Refining Company Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Hengyuan Refining Company Berhad, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

We are a bit worried about the trend of returns on capital at Hengyuan Refining Company Berhad. To be more specific, the ROCE was 15% five years ago, but since then it has dropped noticeably. 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. If these trends continue, we wouldn't expect Hengyuan Refining Company Berhad to turn into a multi-bagger.

On a side note, Hengyuan Refining Company Berhad's current liabilities have increased over the last five years to 53% of total assets, effectively distorting the ROCE to some degree. If current liabilities hadn't increased as much as they did, the ROCE could actually be even lower. And with current liabilities at these levels, suppliers or short-term creditors are effectively funding a large part of the business, which can introduce some risks.

The Key Takeaway

In summary, it's unfortunate that Hengyuan Refining Company Berhad is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 24% 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.

If you'd like to know more about Hengyuan Refining Company Berhad, we've spotted 2 warning signs, and 1 of them is potentially serious.

While Hengyuan Refining Company Berhad isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.