Some Investors May Be Worried About Kluang Rubber Company (Malaya) Berhad's (KLSE:KLUANG) Returns On Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after glancing at the trends within Kluang Rubber Company (Malaya) Berhad (KLSE:KLUANG), we weren't too hopeful.

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. Analysts use this formula to calculate it for Kluang Rubber Company (Malaya) Berhad:

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

0.0014 = RM1.7m ÷ (RM1.2b - RM6.9m) (Based on the trailing twelve months to December 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 7.6%.

See 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're interested in investigating Kluang Rubber Company (Malaya) Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

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

We are a bit worried about the trend of returns on capital at Kluang Rubber Company (Malaya) Berhad. To be more specific, the ROCE was 1.0% 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. 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.

The Bottom Line

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. In spite of that, the stock has delivered a 26% return to shareholders who held over the last five years. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

Kluang Rubber Company (Malaya) Berhad does come with some risks though, we found 3 warning signs in our investment analysis, and 1 of those is 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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