Is This A Sign of Things To Come At Cocoaland Holdings Berhad (KLSE:COCOLND)?

When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. On that note, looking into Cocoaland Holdings Berhad (KLSE:COCOLND), we weren't too upbeat about how things were going.

Return On Capital Employed (ROCE): What is it?

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 Cocoaland Holdings Berhad, this is the formula:

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

0.10 = RM28m ÷ (RM298m - RM27m) (Based on the trailing twelve months to September 2020).

Thus, Cocoaland Holdings Berhad has an ROCE of 10%. On its own, that's a standard return, however it's much better than the 6.8% generated by the Food industry.

View 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 want to delve into the historical earnings, revenue and cash flow of Cocoaland Holdings Berhad, check out these free graphs here.

How Are Returns Trending?

There is reason to be cautious about Cocoaland Holdings Berhad, given the returns are trending downwards. To be more specific, the ROCE was 15% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. 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

In summary, it's unfortunate that Cocoaland Holdings Berhad is generating lower returns from the same amount of capital. Investors must expect better things on the horizon though because the stock has risen 5.0% in the last five years. 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 4 warning signs, and 2 of them are a bit concerning.

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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