Is This A Sign of Things To Come At Minho (M) Berhad (KLSE:MINHO)?

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates the company is producing less profit from its investments and its total assets are decreasing. In light of that, from a first glance at Minho (M) Berhad (KLSE:MINHO), we've spotted some signs that it could be struggling, so let's investigate.

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. Analysts use this formula to calculate it for Minho (M) Berhad:

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

0.0095 = RM4.3m ÷ (RM502m - RM51m) (Based on the trailing twelve months to September 2020).

Thus, Minho (M) Berhad has an ROCE of 1.0%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 3.7%.

Check out our latest analysis for Minho (M) Berhad

While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Minho (M) Berhad, check out these free graphs here.

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Minho (M) Berhad. About five years ago, returns on capital were 7.4%, however they're now substantially lower than that as we saw above. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Minho (M) Berhad becoming one if things continue as they have.

The Bottom Line

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. Investors haven't taken kindly to these developments, since the stock has declined 21% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

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

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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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