Astro Malaysia Holdings Berhad's (KLSE:ASTRO) Returns On Capital Tell Us There Is Reason To Feel Uneasy

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. Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. So after glancing at the trends within Astro Malaysia Holdings Berhad (KLSE:ASTRO), we weren't too hopeful.

Understanding Return On Capital Employed (ROCE)

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Astro Malaysia Holdings Berhad, this is the formula:

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

0.22 = RM706m ÷ (RM5.2b - RM2.0b) (Based on the trailing twelve months to April 2022).

Thus, Astro Malaysia Holdings Berhad has an ROCE of 22%. In absolute terms that's a great return and it's even better than the Media industry average of 8.5%.

Check out our latest analysis for Astro Malaysia Holdings Berhad

In the above chart we have measured Astro Malaysia Holdings Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Astro Malaysia Holdings Berhad here for free.

What Can We Tell From Astro Malaysia Holdings Berhad's ROCE Trend?

We are a bit worried about the trend of returns on capital at Astro Malaysia Holdings Berhad. About five years ago, returns on capital were 28%, 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. 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 Astro Malaysia Holdings Berhad to turn into a multi-bagger.

The Key Takeaway

In summary, it's unfortunate that Astro Malaysia Holdings Berhad is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 57% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

On a final note, we've found 2 warning signs for Astro Malaysia Holdings Berhad that we think you should be aware of.

If you'd like to see other companies earning high returns, check out our free list of companies earning high returns with solid balance sheets here.

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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.