What These Trends Mean At HeveaBoard Berhad (KLSE:HEVEA)

When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. 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. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within HeveaBoard Berhad (KLSE:HEVEA), we weren't too hopeful.

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 HeveaBoard Berhad, this is the formula:

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

0.032 = RM14m ÷ (RM527m - RM81m) (Based on the trailing twelve months to December 2020).

Thus, HeveaBoard Berhad has an ROCE of 3.2%. On its own that's a low return on capital but it's in line with the industry's average returns of 2.8%.

See our latest analysis for HeveaBoard Berhad

Above you can see how the current ROCE for HeveaBoard 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 report for HeveaBoard Berhad.

What Does the ROCE Trend For HeveaBoard Berhad Tell Us?

There is reason to be cautious about HeveaBoard Berhad, given the returns are trending downwards. To be more specific, the ROCE was 23% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on HeveaBoard Berhad becoming one if things continue as they have.

Our Take On HeveaBoard Berhad's ROCE

In summary, it's unfortunate that HeveaBoard Berhad is generating lower returns from the same amount of capital. It should come as no surprise then that the stock has fallen 28% 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.

On a separate note, we've found 2 warning signs for HeveaBoard Berhad you'll probably want to know about.

While HeveaBoard 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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