These Return Metrics Don't Make United Malacca Berhad (KLSE:UMCCA) Look Too Strong

What financial metrics can indicate to us that a company is maturing or even in decline? 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. 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. And from a first read, things don't look too good at United Malacca Berhad (KLSE:UMCCA), so let's see why.

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 United Malacca Berhad is:

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

0.015 = RM25m ÷ (RM1.7b - RM133m) (Based on the trailing twelve months to January 2021).

Thus, United Malacca Berhad has an ROCE of 1.5%. Ultimately, that's a low return and it under-performs the Food industry average of 7.7%.

Check out our latest analysis for United Malacca Berhad

In the above chart we have measured United Malacca Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you're interested, you can view the analysts predictions in our free report on analyst forecasts for the company.

What Does the ROCE Trend For United Malacca Berhad Tell Us?

In terms of United Malacca Berhad's historical ROCE trend, it isn't fantastic. Unfortunately, returns have declined substantially over the last five years to the 1.5% we see today. In addition to that, United Malacca Berhad is now employing 23% less capital than it was five years ago. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

The Bottom Line

In short, lower returns and decreasing amounts capital employed in the business doesn't fill us with confidence. And, the stock has remained flat over the last five years, so investors don't seem too impressed either. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to continue researching United Malacca Berhad, you might be interested to know about the 1 warning sign that our analysis has discovered.

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