Stock Analysis

The Returns On Capital At Privasia Technology Berhad (KLSE:PRIVA) Don't Inspire Confidence

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What financial metrics can indicate to us that a company is maturing or even in decline? Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. And from a first read, things don't look too good at Privasia Technology Berhad (KLSE:PRIVA), so let's see why.

What is Return On Capital Employed (ROCE)?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Privasia Technology Berhad:

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

0.0011 = RM75k ÷ (RM88m - RM18m) (Based on the trailing twelve months to March 2021).

So, Privasia Technology Berhad has an ROCE of 0.1%. Ultimately, that's a low return and it under-performs the IT industry average of 7.6%.

See our latest analysis for Privasia Technology Berhad

KLSE:PRIVA Return on Capital Employed July 27th 2021

Historical performance is a great place to start when researching a stock so above you can see the gauge for Privasia Technology Berhad's ROCE against it's prior returns. If you're interested in investigating Privasia Technology Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

So How Is Privasia Technology Berhad's ROCE Trending?

We are a bit anxious about the trends of ROCE at Privasia Technology Berhad. Unfortunately, returns have declined substantially over the last five years to the 0.1% we see today. What's equally concerning is that the amount of capital deployed in the business has shrunk by 24% over that same period. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. Typically businesses that exhibit these characteristics aren't the ones that tend to multiply over the long term, because statistically speaking, they've already gone through the growth phase of their life cycle.

In Conclusion...

To see Privasia Technology Berhad reducing the capital employed in the business in tandem with diminishing returns, is concerning. In spite of that, the stock has delivered a 27% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

Privasia Technology Berhad does come with some risks though, we found 4 warning signs in our investment analysis, and 1 of those makes us a bit uncomfortable...

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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