Kluang Rubber Company (Malaya) Berhad's (KLSE:KLUANG) Returns On Capital Tell Us There Is Reason To Feel Uneasy

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. 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?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from 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)

0.0082 = RM9.9m ÷ (RM1.2b - RM6.0m) (Based on the trailing twelve months to September 2021).

Thus, Kluang Rubber Company (Malaya) Berhad has an ROCE of 0.8%. Ultimately, that's a low return and it under-performs the Food industry average of 8.4%.

See our latest analysis for Kluang Rubber Company (Malaya) Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Kluang Rubber Company (Malaya) Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings, revenue and cash flow of Kluang Rubber Company (Malaya) Berhad, check out these free graphs here.

What Can We Tell From Kluang Rubber Company (Malaya) Berhad's ROCE Trend?

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 1.1% 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. 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 Kluang Rubber Company (Malaya) Berhad becoming one if things continue as they have.

What We Can Learn From Kluang Rubber Company (Malaya) Berhad's ROCE

In summary, it's unfortunate that Kluang Rubber Company (Malaya) Berhad is generating lower returns from the same amount of capital. But investors must be expecting an improvement of sorts because over the last five yearsthe stock has delivered a respectable 42% return. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

One more thing to note, we've identified 2 warning signs with Kluang Rubber Company (Malaya) Berhad and understanding them should be part of your investment process.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.