The Returns On Capital At IQ Group Holdings Berhad (KLSE:IQGROUP) Don't Inspire Confidence

What underlying fundamental trends can indicate that a company might be 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. Basically the company is earning less on its investments and it is also reducing its total assets. Having said that, after a brief look, IQ Group Holdings Berhad (KLSE:IQGROUP) we aren't filled with optimism, but let's investigate further.

Understanding Return On Capital Employed (ROCE)

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. To calculate this metric for IQ Group Holdings Berhad, this is the formula:

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

0.041 = RM5.4m ÷ (RM162m - RM30m) (Based on the trailing twelve months to September 2021).

Therefore, IQ Group Holdings Berhad has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 14%.

See 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'd like to look at how IQ Group Holdings Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.

What Does the ROCE Trend For IQ Group Holdings Berhad Tell Us?

There is reason to be cautious about IQ Group Holdings Berhad, given the returns are trending downwards. To be more specific, the ROCE was 20% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. 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.

The Bottom Line On IQ Group Holdings Berhad's ROCE

In summary, it's unfortunate that IQ Group Holdings Berhad is generating lower returns from the same amount of capital. This could explain why the stock has sunk a total of 75% in the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we found 3 warning signs for IQ Group Holdings Berhad (1 doesn't sit too well with us) you should be aware of.

For those who like to invest in solid companies, check out this free list of companies with solid balance sheets and high returns on equity.

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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.