Is Kluang Rubber Company (Malaya) Berhad (KLSE:KLUANG) Set To Make A Turnaround?

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. Having said that, after a brief look, Kluang Rubber Company (Malaya) Berhad (KLSE:KLUANG) we aren't filled with optimism, but let's investigate further.

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. The formula for this calculation on Kluang Rubber Company (Malaya) Berhad is:

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

0.0012 = RM1.4m ÷ (RM1.1b - RM5.2m) (Based on the trailing twelve months to September 2020).

Thus, Kluang Rubber Company (Malaya) Berhad has an ROCE of 0.1%. In absolute terms, that's a low return and it also under-performs the Food industry average of 6.8%.

View our latest analysis for Kluang Rubber Company (Malaya) 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'd like to look at how Kluang Rubber Company (Malaya) Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

There is reason to be cautious about Kluang Rubber Company (Malaya) Berhad, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 1.0% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Kluang Rubber Company (Malaya) Berhad to turn into a multi-bagger.

Our Take On Kluang Rubber Company (Malaya) Berhad's ROCE

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Despite the concerning underlying trends, the stock has actually gained 7.4% 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 about the risks facing Kluang Rubber Company (Malaya) Berhad, we've discovered 2 warning signs that you should be aware of.

While Kluang Rubber Company (Malaya) Berhad isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. 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.
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