What These Trends Mean At Karex Berhad (KLSE:KAREX)

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. In light of that, from a first glance at Karex Berhad (KLSE:KAREX), we've spotted some signs that it could be struggling, so let's investigate.

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. To calculate this metric for Karex Berhad, this is the formula:

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

0.028 = RM14m ÷ (RM636m - RM124m) (Based on the trailing twelve months to September 2020).

So, Karex Berhad has an ROCE of 2.8%. Ultimately, that's a low return and it under-performs the Personal Products industry average of 13%.

Check out our latest analysis for Karex Berhad

In the above chart we have measured Karex Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Karex Berhad.

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Karex Berhad. About five years ago, returns on capital were 17%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Karex Berhad to turn into a multi-bagger.

The Bottom Line On Karex Berhad's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 65% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

Karex Berhad could be trading at an attractive price in other respects, so you might find our free intrinsic value estimation on our platform quite valuable.

While Karex Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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