JHM Consolidation Berhad (KLSE:JHM) Could Be Struggling To Allocate Capital

If you're not sure where to start when looking for the next multi-bagger, there are a few key trends you should keep an eye out for. Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. In light of that, when we looked at JHM Consolidation Berhad (KLSE:JHM) and its ROCE trend, we weren't exactly thrilled.

What Is 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. Analysts use this formula to calculate it for JHM Consolidation Berhad:

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

0.13 = RM44m ÷ (RM440m - RM113m) (Based on the trailing twelve months to June 2022).

So, JHM Consolidation Berhad has an ROCE of 13%. That's a pretty standard return and it's in line with the industry average of 13%.

See our latest analysis for JHM Consolidation Berhad

In the above chart we have measured JHM Consolidation Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free report for JHM Consolidation Berhad.

How Are Returns Trending?

On the surface, the trend of ROCE at JHM Consolidation Berhad doesn't inspire confidence. To be more specific, ROCE has fallen from 46% over the last five years. However, given capital employed and revenue have both increased it appears that the business is currently pursuing growth, at the consequence of short term returns. And if the increased capital generates additional returns, the business, and thus shareholders, will benefit in the long run.

On a side note, JHM Consolidation Berhad has done well to pay down its current liabilities to 26% 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.

What We Can Learn From JHM Consolidation Berhad's ROCE

Even though returns on capital have fallen in the short term, we find it promising that revenue and capital employed have both increased for JHM Consolidation Berhad. These growth trends haven't led to growth returns though, since the stock has fallen 27% over the last five years. So we think it'd be worthwhile to look further into this stock given the trends look encouraging.

JHM Consolidation Berhad does have some risks though, and we've spotted 1 warning sign for JHM Consolidation Berhad that you might be interested in.

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.