Is This A Sign of Things To Come At Hiap Teck Venture Berhad (KLSE:HIAPTEK)?

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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. This indicates the company is producing less profit from its investments and its total assets are decreasing. So after we looked into Hiap Teck Venture Berhad (KLSE:HIAPTEK), the trends above didn't look too great.

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

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. To calculate this metric for Hiap Teck Venture Berhad, this is the formula:

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

0.021 = RM19m ÷ (RM1.3b - RM439m) (Based on the trailing twelve months to October 2020).

Therefore, Hiap Teck Venture Berhad has an ROCE of 2.1%. In absolute terms, that's a low return and it also under-performs the Metals and Mining industry average of 3.2%.

Check out our latest analysis for Hiap Teck Venture Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Hiap Teck Venture Berhad's ROCE against it's prior returns. If you're interested in investigating Hiap Teck Venture Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For Hiap Teck Venture Berhad Tell Us?

There is reason to be cautious about Hiap Teck Venture Berhad, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 2.8% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Hiap Teck Venture Berhad to turn into a multi-bagger.

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. However the stock has delivered a 74% return to shareholders over the last five years, so investors might be expecting the trends to turn around. In any case, the current underlying trends don't bode well for long term performance so unless they reverse, we'd start looking elsewhere.

Hiap Teck Venture Berhad does have some risks, we noticed 3 warning signs (and 1 which is significant) we think you should know about.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.
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