The Returns On Capital At CRG Berhad (KLSE:CRG) Don't Inspire Confidence

To avoid investing in a business that's in decline, there's a few financial metrics that can provide early indications of aging. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into CRG Berhad (KLSE:CRG), we weren't too upbeat about how things were going.

Understanding 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 CRG Berhad:

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

0.068 = RM6.5m ÷ (RM116m - RM19m) (Based on the trailing twelve months to December 2020).

Therefore, CRG Berhad has an ROCE of 6.8%. Even though it's in line with the industry average of 7.1%, it's still a low return by itself.

Check out our latest analysis for CRG 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're interested in investigating CRG Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From CRG Berhad's ROCE Trend?

In terms of CRG Berhad's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 12% four years ago, but since then it has dropped noticeably. 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 CRG Berhad becoming one if things continue as they have.

Our Take On CRG Berhad's ROCE

In summary, it's unfortunate that CRG Berhad is generating lower returns from the same amount of capital. Since the stock has skyrocketed 323% over the last year, it looks like investors have high expectations of the stock. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.

If you want to know some of the risks facing CRG Berhad we've found 4 warning signs (1 shouldn't be ignored!) that you should be aware of before investing here.

While CRG 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.

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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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