Here's What We Make Of Classic Scenic Berhad's (KLSE:CSCENIC) Returns On Capital

When researching a stock for investment, what can tell us that the company is in decline? 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. On that note, looking into Classic Scenic Berhad (KLSE:CSCENIC), we weren't too upbeat about how things were going.

Return On Capital Employed (ROCE): What is it?

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. The formula for this calculation on Classic Scenic Berhad is:

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

0.056 = RM5.4m ÷ (RM100m - RM3.6m) (Based on the trailing twelve months to September 2020).

Thus, Classic Scenic Berhad has an ROCE of 5.6%. On its own that's a low return, but compared to the average of 3.7% generated by the Forestry industry, it's much better.

View our latest analysis for Classic Scenic Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Classic Scenic Berhad's ROCE against it's prior returns. If you'd like to look at how Classic Scenic 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 Classic Scenic Berhad's ROCE Trending?

In terms of Classic Scenic Berhad's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 13% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 Classic Scenic Berhad becoming one if things continue as they have.

In Conclusion...

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. And long term shareholders have watched their investments stay flat over the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

On a final note, we found 4 warning signs for Classic Scenic Berhad (1 is a bit unpleasant) you should be aware of.

While Classic Scenic 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.

When trading Classic Scenic Berhad or any other investment, use the platform considered by many to be the Professional's Gateway to the Worlds Market, Interactive Brokers. You get the lowest-cost* trading on stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.