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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. Having said that, after a brief look, Eng Kah Corporation Berhad (KLSE:ENGKAH) we aren't filled with optimism, but let's investigate further.
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. To calculate this metric for Eng Kah Corporation Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.00029 = RM20k ÷ (RM78m - RM10m) (Based on the trailing twelve months to December 2021).
Therefore, Eng Kah Corporation Berhad has an ROCE of 0.03%. In absolute terms, that's a low return and it also under-performs the Personal Products industry average of 13%.
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?
There is reason to be cautious about Eng Kah Corporation Berhad, given the returns are trending downwards. To be more specific, the ROCE was 3.3% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Eng Kah Corporation Berhad becoming one if things continue as they have.
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 36% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
If you want to know some of the risks facing Eng Kah Corporation Berhad we've found 3 warning signs (2 are significant!) that you should be aware of before investing here.
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.
Valuation is complex, but we're helping make it simple.
Find out whether Eng Kah Corporation Berhad is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.View the Free Analysis
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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.
Eng Kah Corporation Berhad
Eng Kah Corporation Berhad, an investment holding company, engages in the manufacture and sale of cosmetics, skin care, perfume, household, toiletry, and personal care products in Malaysia, the United States, and Australia.
Adequate balance sheet and slightly overvalued.