Cocoaland Holdings Berhad's (KLSE:COCOLND) Returns On Capital Not Reflecting Well On The Business

What underlying fundamental trends can indicate that a company might be in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. 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 glancing at the trends within Cocoaland Holdings Berhad (KLSE:COCOLND), we weren't too hopeful.

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 Cocoaland Holdings Berhad is:

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

0.079 = RM20m ÷ (RM274m - RM20m) (Based on the trailing twelve months to December 2020).

Thus, Cocoaland Holdings Berhad has an ROCE of 7.9%. In absolute terms, that's a low return but it's around the Food industry average of 7.3%.

Check out our latest analysis for Cocoaland Holdings Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Cocoaland Holdings Berhad's ROCE against it's prior returns. If you'd like to look at how Cocoaland Holdings Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Cocoaland Holdings Berhad Tell Us?

We are a bit worried about the trend of returns on capital at Cocoaland Holdings Berhad. About five years ago, returns on capital were 19%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Cocoaland Holdings Berhad becoming one if things continue as they have.

The Bottom Line On Cocoaland 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. Despite the concerning underlying trends, the stock has actually gained 20% over the last five years, so it might be that the investors are expecting the trends to reverse. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

If you'd like to know more about Cocoaland Holdings Berhad, we've spotted 3 warning signs, and 1 of them is potentially serious.

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