How Has JCY International Berhad (KLSE:JCY) Allocated Its Capital?

If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after we looked into JCY International Berhad (KLSE:JCY), the trends above didn't look too great.

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 JCY International Berhad, this is the formula:

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

0.056 = RM53m ÷ (RM1.2b - RM208m) (Based on the trailing twelve months to September 2020).

Therefore, JCY International Berhad has an ROCE of 5.6%. In absolute terms, that's a low return and it also under-performs the Tech industry average of 9.4%.

See our latest analysis for JCY International Berhad

Above you can see how the current ROCE for JCY International Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering JCY International Berhad here for free.

The Trend Of ROCE

The trend of ROCE at JCY International Berhad is showing some signs of weakness. The company used to generate 16% on its capital five years ago but it has since fallen noticeably. In addition to that, JCY International Berhad is now employing 30% less capital than it was five years ago. 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.

The Bottom Line

In summary, it's unfortunate that JCY International Berhad is shrinking its capital base and also generating lower returns. It should come as no surprise then that the stock has fallen 12% over the last five years, so it looks like investors are recognizing these changes. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

One more thing: We've identified 4 warning signs with JCY International Berhad (at least 1 which is potentially serious) , and understanding these would certainly be useful.

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This article by Simply Wall St is general in nature. 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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