Be Wary Of Privasia Technology Berhad (KLSE:PRIVA) And Its Returns On Capital

When researching a stock for investment, what can tell us that the company is in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. Basically the company is earning less on its investments and it is also reducing its total assets. Having said that, after a brief look, Privasia Technology Berhad (KLSE:PRIVA) we aren't filled with optimism, but let's investigate further.

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. To calculate this metric for Privasia Technology Berhad, this is the formula:

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

0.0081 = RM565k ÷ (RM95m - RM25m) (Based on the trailing twelve months to September 2020).

Therefore, Privasia Technology Berhad has an ROCE of 0.8%. In absolute terms, that's a low return and it also under-performs the IT industry average of 9.8%.

View our latest analysis for Privasia Technology 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 want to delve into the historical earnings, revenue and cash flow of Privasia Technology Berhad, check out these free graphs here.

What The Trend Of ROCE Can Tell Us

We are a bit anxious about the trends of ROCE at Privasia Technology Berhad. To be more specific, today's ROCE was 8.5% five years ago but has since fallen to 0.8%. On top of that, the business is utilizing 25% less capital within its operations. The fact that both are shrinking is an indication that the business is going through some tough times. If these underlying trends continue, we wouldn't be too optimistic going forward.

What We Can Learn From Privasia Technology Berhad's ROCE

In summary, it's unfortunate that Privasia Technology Berhad is shrinking its capital base and also generating lower returns. Long term shareholders who've owned the stock over the last five years have experienced a 27% depreciation in their investment, so it appears the market might not like these trends either. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about Privasia Technology Berhad, we've spotted 3 warning signs, and 1 of them shouldn't be ignored.

While Privasia Technology 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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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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