GUH Holdings Berhad (KLSE:GUH) Could Be At Risk Of Shrinking As A Company

When researching a stock for investment, what can tell us that the company is 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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. Having said that, after a brief look, GUH Holdings Berhad (KLSE:GUH) we aren't filled with optimism, but let's investigate further.

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

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. Analysts use this formula to calculate it for GUH Holdings Berhad:

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

0.012 = RM6.4m ÷ (RM647m - RM115m) (Based on the trailing twelve months to June 2022).

Therefore, GUH Holdings Berhad has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 15%.

Check out our latest analysis for GUH Holdings 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're interested in investigating GUH Holdings Berhad's past further, check out this free graph of past earnings, revenue and cash flow.

What Can We Tell From GUH Holdings Berhad's ROCE Trend?

In terms of GUH Holdings Berhad's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 3.3% 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. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. If these trends continue, we wouldn't expect GUH Holdings 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. It should come as no surprise then that the stock has fallen 48% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

Like most companies, GUH Holdings Berhad does come with some risks, and we've found 1 warning sign that you should be aware of.

While GUH Holdings 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.