Some Investors May Be Worried About Ranhill Utilities Berhad's (KLSE:RANHILL) Returns On Capital

Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? More often than not, we'll see a declining return on capital employed (ROCE) and a declining 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. And from a first read, things don't look too good at Ranhill Utilities Berhad (KLSE:RANHILL), so let's see why.

Return On Capital Employed (ROCE): What is it?

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. 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)

0.043 = RM82m ÷ (RM2.3b - RM374m) (Based on the trailing twelve months to December 2020).

Therefore, Ranhill Utilities Berhad has an ROCE of 4.3%. In absolute terms, that's a low return and it also under-performs the Water Utilities industry average of 7.4%.

See our latest analysis for Ranhill Utilities Berhad

Above you can see how the current ROCE for Ranhill Utilities Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free report for Ranhill Utilities Berhad.

What Does the ROCE Trend For Ranhill Utilities Berhad Tell Us?

In terms of Ranhill Utilities Berhad's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 6.6% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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.

On a side note, Ranhill Utilities Berhad has done well to pay down its current liabilities to 16% of total assets. That could partly explain why the ROCE has dropped. What's more, this can reduce some aspects of risk to the business because now the company's suppliers or short-term creditors are funding less of its operations. 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 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. In spite of that, the stock has delivered a 18% return to shareholders who held over the last five years. Either way, we aren't huge fans of the current trends and so with that we think you might find better investments elsewhere.

One final note, you should learn about the 3 warning signs we've spotted with Ranhill Utilities Berhad (including 1 which doesn't sit too well with us) .

While Ranhill Utilities 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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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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