Be Wary Of Evergreen Fibreboard Berhad (KLSE:EVERGRN) And Its Returns On Capital

What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after glancing at the trends within Evergreen Fibreboard Berhad (KLSE:EVERGRN), we weren't too hopeful.

Understanding 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. Analysts use this formula to calculate it for Evergreen Fibreboard Berhad:

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

0.045 = RM51m ÷ (RM1.4b - RM287m) (Based on the trailing twelve months to December 2021).

Therefore, Evergreen Fibreboard Berhad has an ROCE of 4.5%. On its own, that's a low figure but it's around the 5.5% average generated by the Forestry industry.

View our latest analysis for Evergreen Fibreboard Berhad

Above you can see how the current ROCE for Evergreen Fibreboard Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering Evergreen Fibreboard Berhad here for free.

So How Is Evergreen Fibreboard Berhad's ROCE Trending?

We are a bit worried about the trend of returns on capital at Evergreen Fibreboard Berhad. About five years ago, returns on capital were 7.2%, however they're now substantially lower than that as we saw above. 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 Evergreen Fibreboard Berhad becoming one if things continue as they have.

In Conclusion...

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. It should come as no surprise then that the stock has fallen 33% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Like most companies, Evergreen Fibreboard Berhad does come with some risks, and we've found 1 warning sign that you should be aware of.

While Evergreen Fibreboard 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.