Ranhill Utilities Berhad (KLSE:RANHILL) Will Be Looking To Turn Around Its Returns

When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. So after we looked into Ranhill Utilities Berhad (KLSE:RANHILL), the trends above didn't look too great.

Understanding 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. To calculate this metric for Ranhill Utilities Berhad, this is the formula:

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

0.02 = RM42m ÷ (RM3.0b - RM884m) (Based on the trailing twelve months to September 2022).

Thus, Ranhill Utilities Berhad has an ROCE of 2.0%. Ultimately, that's a low return and it under-performs the Water Utilities industry average of 7.1%.

Check out our latest analysis for Ranhill Utilities Berhad

In the above chart we have measured Ranhill Utilities 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 Ranhill Utilities Berhad here for free.

So How Is Ranhill Utilities Berhad's ROCE Trending?

In terms of Ranhill Utilities Berhad's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 7.8% 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 Ranhill Utilities Berhad becoming one if things continue as they have.

Our Take On Ranhill Utilities Berhad's ROCE

All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. It should come as no surprise then that the stock has fallen 17% 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.

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

While Ranhill Utilities Berhad isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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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.