The Returns On Capital At YTL Power International Berhad (KLSE:YTLPOWR) Don't Inspire Confidence

What underlying fundamental trends can indicate that a company might be 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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. And from a first read, things don't look too good at YTL Power International Berhad (KLSE:YTLPOWR), 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. The formula for this calculation on YTL Power International Berhad is:

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

0.026 = RM1.0b ÷ (RM50b - RM11b) (Based on the trailing twelve months to December 2021).

So, YTL Power International Berhad has an ROCE of 2.6%. In absolute terms, that's a low return and it also under-performs the Integrated Utilities industry average of 5.0%.

View our latest analysis for YTL Power International Berhad

In the above chart we have measured YTL Power International 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 YTL Power International Berhad here for free.

The Trend Of ROCE

In terms of YTL Power International Berhad's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 3.3% five years ago, but since then it has dropped noticeably. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on YTL Power International Berhad becoming one if things continue as they have.

What We Can Learn From YTL Power International Berhad's ROCE

In summary, it's unfortunate that YTL Power International Berhad is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 36% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

Since virtually every company faces some risks, it's worth knowing what they are, and we've spotted 3 warning signs for YTL Power International Berhad (of which 2 make us uncomfortable!) that you should know about.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive 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.