Be Wary Of Icon Offshore Berhad (KLSE:ICON) And Its Returns On Capital

When researching a stock for investment, what can tell us that the company is in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. In light of that, from a first glance at Icon Offshore Berhad (KLSE:ICON), we've spotted some signs that it could be struggling, so let's investigate.

What is 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. The formula for this calculation on Icon Offshore Berhad is:

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

0.023 = RM16m ÷ (RM947m - RM259m) (Based on the trailing twelve months to March 2021).

Therefore, Icon Offshore Berhad has an ROCE of 2.3%. Ultimately, that's a low return and it under-performs the Energy Services industry average of 8.8%.

Check out our latest analysis for Icon Offshore Berhad

Above you can see how the current ROCE for Icon Offshore 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 Icon Offshore Berhad here for free.

The Trend Of ROCE

The trend of ROCE at Icon Offshore Berhad is showing some signs of weakness. To be more specific, today's ROCE was 3.8% five years ago but has since fallen to 2.3%. On top of that, the business is utilizing 44% less capital within its operations. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

On a side note, Icon Offshore Berhad's current liabilities have increased over the last five years to 27% 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. Keep an eye on this ratio, because the business could encounter some new risks if this metric gets too high.

Our Take On Icon Offshore Berhad's ROCE

To see Icon Offshore Berhad reducing the capital employed in the business in tandem with diminishing returns, is concerning. We expect this has contributed to the stock plummeting 99% during the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Icon Offshore Berhad does have some risks though, and we've spotted 3 warning signs for Icon Offshore Berhad that you might be interested in.

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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