Returns On Capital Signal Tricky Times Ahead For Classic Scenic Berhad (KLSE:CSCENIC)

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. Having said that, from a first glance at Classic Scenic Berhad (KLSE:CSCENIC) we aren't jumping out of our chairs at how returns are trending, but let's have a deeper look.

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

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

0.063 = RM9.4m ÷ (RM153m - RM4.3m) (Based on the trailing twelve months to March 2022).

So, Classic Scenic Berhad has an ROCE of 6.3%. Even though it's in line with the industry average of 6.3%, it's still a low return by itself.

See 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.

How Are Returns Trending?

When we looked at the ROCE trend at Classic Scenic Berhad, we didn't gain much confidence. Around five years ago the returns on capital were 17%, but since then they've fallen to 6.3%. Meanwhile, the business is utilizing more capital but this hasn't moved the needle much in terms of sales in the past 12 months, so this could reflect longer term investments. It may take some time before the company starts to see any change in earnings from these investments.

Our Take On Classic Scenic Berhad's ROCE

To conclude, we've found that Classic Scenic Berhad is reinvesting in the business, but returns have been falling. And investors may be recognizing these trends since the stock has only returned a total of 7.9% to shareholders over the last five years. Therefore, if you're looking for a multi-bagger, we'd propose looking at other options.

Classic Scenic Berhad does come with some risks though, we found 3 warning signs in our investment analysis, and 2 of those are a bit unpleasant...

While Classic Scenic 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.