BLD Plantation Bhd's (KLSE:BLDPLNT) Returns On Capital Tell Us There Is Reason To Feel Uneasy

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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. On that note, looking into BLD Plantation Bhd (KLSE:BLDPLNT), we weren't too upbeat about how things were going.

Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for BLD Plantation Bhd:

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

0.034 = RM31m ÷ (RM1.2b - RM329m) (Based on the trailing twelve months to June 2023).

Thus, BLD Plantation Bhd has an ROCE of 3.4%. In absolute terms, that's a low return and it also under-performs the Food industry average of 6.4%.

See our latest analysis for BLD Plantation Bhd

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'd like to look at how BLD Plantation Bhd has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Can We Tell From BLD Plantation Bhd's ROCE Trend?

In terms of BLD Plantation Bhd's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 6.6% 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. 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. If these trends continue, we wouldn't expect BLD Plantation Bhd to turn into a multi-bagger.

The Bottom Line

In summary, it's unfortunate that BLD Plantation Bhd is generating lower returns from the same amount of capital. Yet despite these concerning fundamentals, the stock has performed strongly with a 59% return over the last five years, so investors appear very optimistic. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Like most companies, BLD Plantation Bhd does come with some risks, and we've found 1 warning sign that you should be aware of.

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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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.