How Has Jaya Tiasa Holdings Berhad (KLSE:JTIASA) Allocated Its Capital?

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. On that note, looking into Jaya Tiasa Holdings Berhad (KLSE:JTIASA), we weren't too upbeat about how things were going.

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

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. The formula for this calculation on Jaya Tiasa Holdings Berhad is:

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

0.023 = RM35m ÷ (RM2.1b - RM564m) (Based on the trailing twelve months to September 2020).

Therefore, Jaya Tiasa Holdings Berhad has an ROCE of 2.3%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 3.7%.

See our latest analysis for Jaya Tiasa Holdings Berhad

Above you can see how the current ROCE for Jaya Tiasa Holdings 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 Jaya Tiasa Holdings Berhad.

What The Trend Of ROCE Can Tell Us

The trend of ROCE at Jaya Tiasa Holdings Berhad is showing some signs of weakness. Unfortunately, returns have declined substantially over the last five years to the 2.3% we see today. In addition to that, Jaya Tiasa Holdings Berhad is now employing 34% less capital than it was five years ago. The fact that both are shrinking is an indication that the business is going through some tough times. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

The Bottom Line

To see Jaya Tiasa Holdings Berhad reducing the capital employed in the business in tandem with diminishing returns, is concerning. Investors haven't taken kindly to these developments, since the stock has declined 42% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

While Jaya Tiasa Holdings Berhad doesn't shine too bright in this respect, it's still worth seeing if the company is trading at attractive prices. You can find that out with our FREE intrinsic value estimation on our platform.

While Jaya Tiasa Holdings 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.

If you’re looking to trade Jaya Tiasa Holdings Berhad, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade 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.