Returns On Capital Signal Difficult Times Ahead For Astro Malaysia Holdings Berhad (KLSE:ASTRO)

What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don't look too good at Astro Malaysia Holdings Berhad (KLSE:ASTRO), so let's see why.

What Is Return On Capital Employed (ROCE)?

Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested 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)

0.062 = RM277m ÷ (RM5.7b - RM1.2b) (Based on the trailing twelve months to October 2023).

Therefore, Astro Malaysia Holdings Berhad has an ROCE of 6.2%. In absolute terms, that's a low return but it's around the Media industry average of 7.6%.

Check out our latest analysis for Astro Malaysia Holdings Berhad

Above you can see how the current ROCE for Astro Malaysia Holdings Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you're interested, you can view the analysts predictions in our free analyst report for Astro Malaysia Holdings Berhad .

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

There is reason to be cautious about Astro Malaysia Holdings Berhad, given the returns are trending downwards. About five years ago, returns on capital were 20%, 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Astro Malaysia Holdings Berhad becoming one if things continue as they have.

The Key Takeaway

In summary, it's unfortunate that Astro Malaysia Holdings Berhad is generating lower returns from the same amount of capital. We expect this has contributed to the stock plummeting 74% during the last five years. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.

If you want to know some of the risks facing Astro Malaysia Holdings Berhad we've found 3 warning signs (1 is a bit unpleasant!) that you should be aware of before investing here.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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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.