InNature Berhad's (KLSE:INNATURE) Returns On Capital Not Reflecting Well On The Business

By
Simply Wall St
Published
May 12, 2022
KLSE:INNATURE
Source: Shutterstock

What financial metrics can indicate to us that a company is maturing or even in decline? 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. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into InNature Berhad (KLSE:INNATURE), the trends above didn't look too great.

What is Return On Capital Employed (ROCE)?

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on InNature Berhad is:

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

0.14 = RM21m ÷ (RM184m - RM28m) (Based on the trailing twelve months to December 2021).

Thus, InNature Berhad has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Specialty Retail industry average of 12%.

See our latest analysis for InNature Berhad

roce
KLSE:INNATURE Return on Capital Employed May 12th 2022

Above you can see how the current ROCE for InNature 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 InNature Berhad.

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

In terms of InNature Berhad's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 19% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 InNature Berhad to turn into a multi-bagger.

In Conclusion...

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. In spite of that, the stock has delivered a 0.5% return to shareholders who held over the last year. Regardless, we don't like the trends as they are and if they persist, we think you might find better investments elsewhere.

If you want to know some of the risks facing InNature Berhad we've found 2 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.

While InNature Berhad may not currently earn the highest returns, we've compiled a list of companies that currently earn more than 25% return on equity. Check out this free list here.

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