Cnergenz Berhad (KLSE:CNERGEN) Might Be Having Difficulty Using Its Capital Effectively

There are a few key trends to look for if we want to identify the next multi-bagger. 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. Ultimately, this demonstrates that it's a business that is reinvesting profits at increasing rates of return. In light of that, when we looked at Cnergenz Berhad (KLSE:CNERGEN) and its ROCE trend, we weren't exactly thrilled.

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

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

0.092 = RM15m ÷ (RM199m - RM36m) (Based on the trailing twelve months to December 2023).

Therefore, Cnergenz Berhad has an ROCE of 9.2%. In absolute terms, that's a low return but it's around the Electronic industry average of 11%.

Check out our latest analysis for Cnergenz Berhad

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

How Are Returns Trending?

When we looked at the ROCE trend at Cnergenz Berhad, we didn't gain much confidence. Over the last five years, returns on capital have decreased to 9.2% from 54% five years ago. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

On a side note, Cnergenz Berhad has done well to pay down its current liabilities to 18% of total assets. So we could link some of this to the decrease in ROCE. Effectively this means their suppliers or short-term creditors are funding less of the business, which reduces some elements of risk. Some would claim this reduces the business' efficiency at generating ROCE since it is now funding more of the operations with its own money.

Our Take On Cnergenz Berhad's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Cnergenz Berhad have fallen, meanwhile the business is employing more capital than it was five years ago. It should come as no surprise then that the stock has fallen 36% over the last year, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Cnergenz Berhad (including 1 which is significant) .

While Cnergenz 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.