When researching a stock for investment, what can tell us that the company is in decline? 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. Basically the company is earning less on its investments and it is also reducing its total assets. And from a first read, things don't look too good at Suria Capital Holdings Berhad (KLSE:SURIA), so let's see why.
What is Return On Capital Employed (ROCE)?
For those who don't know, ROCE is a measure of a company's yearly pre-tax profit (its return), relative to the capital employed in the business. Analysts use this formula to calculate it for Suria Capital Holdings Berhad:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.027 = RM35m ÷ (RM1.4b - RM72m) (Based on the trailing twelve months to September 2020).
Therefore, Suria Capital Holdings Berhad has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Infrastructure industry average of 7.0%.
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you want to delve into the historical earnings, revenue and cash flow of Suria Capital Holdings Berhad, check out these free graphs here.
How Are Returns Trending?
We are a bit worried about the trend of returns on capital at Suria Capital Holdings Berhad. To be more specific, the ROCE was 15% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Suria Capital Holdings Berhad becoming one if things continue as they have.
Our Take On Suria Capital Holdings Berhad's ROCE
In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Long term shareholders who've owned the stock over the last five years have experienced a 35% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.
If you'd like to know more about Suria Capital Holdings Berhad, we've spotted 3 warning signs, and 1 of them makes us a bit uncomfortable.
While Suria Capital 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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