Here's What's Concerning About Eng Kah Corporation Berhad's (KLSE:ENGKAH) Returns On Capital

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. So after glancing at the trends within Eng Kah Corporation Berhad (KLSE:ENGKAH), 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 Eng Kah Corporation Berhad:

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

0.0048 = RM351k ÷ (RM85m - RM12m) (Based on the trailing twelve months to September 2021).

Therefore, Eng Kah Corporation Berhad has an ROCE of 0.5%. In absolute terms, that's a low return and it also under-performs the Personal Products industry average of 13%.

Check out our latest analysis for Eng Kah Corporation Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Eng Kah Corporation Berhad's ROCE against it's prior returns. If you'd like to look at how Eng Kah Corporation Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

So How Is Eng Kah Corporation Berhad's ROCE Trending?

We are a bit worried about the trend of returns on capital at Eng Kah Corporation Berhad. About five years ago, returns on capital were 0.8%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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. If these trends continue, we wouldn't expect Eng Kah Corporation Berhad to turn into a multi-bagger.

The Bottom Line On Eng Kah Corporation Berhad's ROCE

In summary, it's unfortunate that Eng Kah Corporation Berhad is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 41% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about Eng Kah Corporation Berhad, we've spotted 5 warning signs, and 1 of them is a bit concerning.

While Eng Kah Corporation 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. 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.