The Returns On Capital At Amway (Malaysia) Holdings Berhad (KLSE:AMWAY) Don't Inspire Confidence

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. 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. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at Amway (Malaysia) Holdings Berhad (KLSE:AMWAY), 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 Amway (Malaysia) Holdings Berhad:

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

0.23 = RM52m ÷ (RM484m - RM255m) (Based on the trailing twelve months to December 2020).

Therefore, Amway (Malaysia) Holdings Berhad has an ROCE of 23%. In absolute terms that's a great return and it's even better than the Online Retail industry average of 10%.

Check out our latest analysis for Amway (Malaysia) Holdings Berhad

Above you can see how the current ROCE for Amway (Malaysia) 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 Amway (Malaysia) Holdings Berhad.

The Trend Of ROCE

We are a bit worried about the trend of returns on capital at Amway (Malaysia) Holdings Berhad. About five years ago, returns on capital were 39%, however they're now substantially lower than that as we saw above. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Amway (Malaysia) Holdings Berhad to turn into a multi-bagger.

On a separate but related note, it's important to know that Amway (Malaysia) Holdings Berhad has a current liabilities to total assets ratio of 53%, which we'd consider pretty high. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.

What We Can Learn From Amway (Malaysia) Holdings Berhad's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. It should come as no surprise then that the stock has fallen 28% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One final note, you should learn about the 2 warning signs we've spotted with Amway (Malaysia) Holdings Berhad (including 1 which makes us a bit uncomfortable) .

High returns are a key ingredient to strong performance, so check out our free list ofstocks earning high returns on equity with solid balance sheets.

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