Some Investors May Be Worried About Cahya Mata Sarawak Berhad's (KLSE:CMSB) Returns On Capital

If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at Cahya Mata Sarawak Berhad (KLSE:CMSB), we've spotted some signs that it could be struggling, so let's investigate.

What Is Return On Capital Employed (ROCE)?

For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. To calculate this metric for Cahya Mata Sarawak Berhad, this is the formula:

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

0.0057 = RM22m ÷ (RM4.6b - RM696m) (Based on the trailing twelve months to March 2024).

Therefore, Cahya Mata Sarawak Berhad has an ROCE of 0.6%. Ultimately, that's a low return and it under-performs the Basic Materials industry average of 9.7%.

View our latest analysis for Cahya Mata Sarawak Berhad

Above you can see how the current ROCE for Cahya Mata Sarawak Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Cahya Mata Sarawak Berhad .

What Does the ROCE Trend For Cahya Mata Sarawak Berhad Tell Us?

We are a bit worried about the trend of returns on capital at Cahya Mata Sarawak Berhad. Unfortunately the returns on capital have diminished from the 7.6% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Cahya Mata Sarawak Berhad becoming one if things continue as they have.

In Conclusion...

In summary, it's unfortunate that Cahya Mata Sarawak Berhad is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 50% over the last five years, so it looks like investors are recognizing these changes. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you'd like to know about the risks facing Cahya Mata Sarawak Berhad, we've discovered 1 warning sign that you should be aware of.

While Cahya Mata Sarawak 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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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.

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