Wah Seong Corporation Berhad (KLSE:WASEONG) Could Be At Risk Of Shrinking As A Company

What financial metrics can indicate to us that a company is maturing or even in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Wah Seong Corporation Berhad (KLSE:WASEONG), so let's see why.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Wah Seong Corporation Berhad is:

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

0.0069 = RM7.8m ÷ (RM2.3b - RM1.2b) (Based on the trailing twelve months to March 2021).

So, Wah Seong Corporation Berhad has an ROCE of 0.7%. In absolute terms, that's a low return and it also under-performs the Energy Services industry average of 8.8%.

View our latest analysis for Wah Seong Corporation Berhad

In the above chart we have measured Wah Seong Corporation 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 Wah Seong Corporation Berhad here for free.

What Does the ROCE Trend For Wah Seong Corporation Berhad Tell Us?

The trend of returns that Wah Seong Corporation Berhad is generating are raising some concerns. The company used to generate 1.4% on its capital five years ago but it has since fallen noticeably. On top of that, the business is utilizing 25% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

Another thing to note, Wah Seong Corporation Berhad has a high ratio of current liabilities to total assets of 51%. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.

Our Take On Wah Seong Corporation Berhad's ROCE

In summary, it's unfortunate that Wah Seong Corporation Berhad is shrinking its capital base and also generating lower returns. Investors haven't taken kindly to these developments, since the stock has declined 14% 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 Wah Seong Corporation 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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