Capital Allocation Trends At IQ Group Holdings Berhad (KLSE:IQGROUP) Aren't Ideal

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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. 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 IQ Group Holdings Berhad (KLSE:IQGROUP), 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. The formula for this calculation on IQ Group Holdings Berhad is:

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

0.069 = RM9.3m ÷ (RM166m - RM32m) (Based on the trailing twelve months to June 2021).

Therefore, IQ Group Holdings Berhad has an ROCE of 6.9%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 13%.

Check out our latest analysis for IQ Group Holdings Berhad

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

How Are Returns Trending?

We are a bit worried about the trend of returns on capital at IQ Group Holdings Berhad. To be more specific, the ROCE was 17% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on IQ Group Holdings Berhad becoming one if things continue as they have.

What We Can Learn From IQ Group Holdings Berhad's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 42% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

IQ Group Holdings Berhad does have some risks, we noticed 2 warning signs (and 1 which shouldn't be ignored) we think you should know about.

While IQ Group Holdings 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. 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.
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