What These Trends Mean At MSM Malaysia Holdings Berhad (KLSE:MSM)

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within MSM Malaysia Holdings Berhad (KLSE:MSM), we weren't too hopeful.

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

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. Analysts use this formula to calculate it for MSM Malaysia Holdings Berhad:

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

0.024 = RM51m ÷ (RM2.9b - RM678m) (Based on the trailing twelve months to September 2020).

So, MSM Malaysia Holdings Berhad has an ROCE of 2.4%. In absolute terms, that's a low return and it also under-performs the Food industry average of 7.2%.

Check out our latest analysis for MSM Malaysia Holdings Berhad

In the above chart we have measured MSM Malaysia Holdings Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering MSM Malaysia Holdings Berhad here for free.

What Does the ROCE Trend For MSM Malaysia Holdings Berhad Tell Us?

There is reason to be cautious about MSM Malaysia Holdings Berhad, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 18% that they were earning five years ago. 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. If these trends continue, we wouldn't expect MSM Malaysia Holdings Berhad to turn into a multi-bagger.

What We Can Learn From MSM Malaysia 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. Unsurprisingly then, the stock has dived 88% over the last five years, so investors are recognizing these changes and don't like the company's prospects. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing: We've identified 2 warning signs with MSM Malaysia Holdings Berhad (at least 1 which shouldn't be ignored) , and understanding these would certainly be useful.

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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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