Apollo Food Holdings Berhad (KLSE:APOLLO) Has Some Difficulty Using Its Capital Effectively

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 indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after we looked into Apollo Food Holdings Berhad (KLSE:APOLLO), the trends above didn't look too great.

Understanding Return On Capital Employed (ROCE)

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Apollo Food Holdings Berhad, this is the formula:

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

0.065 = RM16m ÷ (RM254m - RM13m) (Based on the trailing twelve months to January 2021).

Therefore, Apollo Food Holdings Berhad has an ROCE of 6.5%. On its own that's a low return on capital but it's in line with the industry's average returns of 7.4%.

Check out our latest analysis for Apollo Food Holdings Berhad

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Apollo Food Holdings Berhad, check out these free graphs here.

What Can We Tell From Apollo Food Holdings Berhad's ROCE Trend?

There is reason to be cautious about Apollo Food Holdings Berhad, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 15% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Apollo Food Holdings Berhad becoming one if things continue as they have.

The Bottom Line On Apollo Food Holdings 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 haven't taken kindly to these developments, since the stock has declined 11% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Apollo Food Holdings Berhad (including 1 which shouldn't be ignored) .

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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