Investors Could Be Concerned With ASTEEL Group Berhad's (KLSE:ASTEEL) Returns On Capital

What financial metrics can indicate to us that a company is maturing or even in decline? 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. In light of that, from a first glance at ASTEEL Group Berhad (KLSE:ASTEEL), we've spotted some signs that it could be struggling, so let's investigate.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for ASTEEL Group Berhad, this is the formula:

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

0.0035 = RM375k ÷ (RM231m - RM125m) (Based on the trailing twelve months to September 2023).

Thus, ASTEEL Group Berhad has an ROCE of 0.4%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 6.0%.

Check out our latest analysis for ASTEEL Group Berhad

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you're interested in investigating ASTEEL Group Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

How Are Returns Trending?

The trend of returns that ASTEEL Group Berhad is generating are raising some concerns. To be more specific, today's ROCE was 8.6% five years ago but has since fallen to 0.4%. In addition to that, ASTEEL Group Berhad is now employing 43% less capital than it was five years ago. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.

On a separate but related note, it's important to know that ASTEEL Group Berhad has a current liabilities to total assets ratio of 54%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

The Bottom Line

To see ASTEEL Group Berhad reducing the capital employed in the business in tandem with diminishing returns, is concerning. 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.

One more thing: We've identified 3 warning signs with ASTEEL Group Berhad (at least 1 which is a bit concerning) , and understanding them would certainly be useful.

While ASTEEL Group 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.