Returns On Capital Signal Tricky Times Ahead For ARB Berhad (KLSE:ARBB)

Finding a business that has the potential to grow substantially is not easy, but it is possible if we look at a few key financial metrics. One common approach is to try and find a company with returns on capital employed (ROCE) that are increasing, in conjunction with a growing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. However, after briefly looking over the numbers, we don't think ARB Berhad (KLSE:ARBB) has the makings of a multi-bagger going forward, but let's have a look at why that may be.

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Return On Capital Employed (ROCE): What Is It?

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. Analysts use this formula to calculate it for ARB Berhad:

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

0.0098 = RM2.0m ÷ (RM209m - RM754k) (Based on the trailing twelve months to December 2024).

Therefore, ARB Berhad has an ROCE of 1.0%. Ultimately, that's a low return and it under-performs the IT industry average of 13%.

View our latest analysis for ARB Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for ARB Berhad's ROCE against it's prior returns. If you'd like to look at how ARB Berhad has performed in the past in other metrics, you can view this free graph of ARB Berhad's past earnings, revenue and cash flow.

The Trend Of ROCE

On the surface, the trend of ROCE at ARB Berhad doesn't inspire confidence. Around five years ago the returns on capital were 26%, but since then they've fallen to 1.0%. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Key Takeaway

In summary, we're somewhat concerned by ARB Berhad's diminishing returns on increasing amounts of capital. Unsurprisingly then, the stock has dived 89% over the last five years, so investors are recognizing these changes and don't like the company's prospects. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

ARB Berhad does have some risks though, and we've spotted 3 warning signs for ARB Berhad that you might be interested in.

While ARB 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. 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.