Maxis Berhad (KLSE:MAXIS) Could Be Struggling To Allocate Capital

What financial metrics can indicate to us that a company is maturing or even in decline? 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 indicates the company is producing less profit from its investments and its total assets are decreasing. And from a first read, things don't look too good at Maxis Berhad (KLSE:MAXIS), 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 Maxis Berhad is:

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

0.11 = RM2.0b ÷ (RM23b - RM5.2b) (Based on the trailing twelve months to June 2023).

Thus, Maxis Berhad has an ROCE of 11%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Wireless Telecom industry average of 9.8%.

See our latest analysis for Maxis Berhad

In the above chart we have measured Maxis Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like, you can check out the forecasts from the analysts covering Maxis Berhad here for free.

What The Trend Of ROCE Can Tell Us

There is reason to be cautious about Maxis Berhad, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 19% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Maxis Berhad to turn into a multi-bagger.

Our Take On Maxis Berhad's ROCE

In summary, it's unfortunate that Maxis Berhad is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 13% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

If you'd like to know more about Maxis Berhad, we've spotted 2 warning signs, and 1 of them is concerning.

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.