If you're looking at a mature business that's past the growth phase, what are some of the underlying trends that pop up? 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 Engtex Group Berhad (KLSE:ENGTEX), the trends above didn't look too great.
What Is Return On Capital Employed (ROCE)?
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 Engtex Group Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.048 = RM41m ÷ (RM1.6b - RM732m) (Based on the trailing twelve months to December 2023).
So, Engtex Group Berhad has an ROCE of 4.8%. Ultimately, that's a low return and it under-performs the Trade Distributors industry average of 10%.
Check out our latest analysis for Engtex Group Berhad
In the above chart we have measured Engtex Group Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Engtex Group Berhad .
What Does the ROCE Trend For Engtex Group Berhad Tell Us?
We are a bit worried about the trend of returns on capital at Engtex Group Berhad. About five years ago, returns on capital were 6.0%, however they're now substantially lower than that as we saw above. 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 Engtex Group Berhad to turn into a multi-bagger.
On a separate but related note, it's important to know that Engtex Group Berhad has a current liabilities to total assets ratio of 46%, which we'd consider pretty high. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.