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Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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 Crest Builder Holdings Berhad (KLSE:CRESBLD), the trends above didn't look too great.
Understanding Return On Capital Employed (ROCE)
Just to clarify if you're unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. To calculate this metric for Crest Builder Holdings Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.025 = RM20m ÷ (RM1.3b - RM527m) (Based on the trailing twelve months to March 2023).
Therefore, Crest Builder Holdings Berhad has an ROCE of 2.5%. Ultimately, that's a low return and it under-performs the Construction industry average of 5.9%.
See our latest analysis for Crest Builder Holdings Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Crest Builder Holdings Berhad's ROCE against it's prior returns. If you're interested in investigating Crest Builder Holdings Berhad's past further, check out this free graph of past earnings, revenue and cash flow.
How Are Returns Trending?
We are a bit worried about the trend of returns on capital at Crest Builder Holdings Berhad. Unfortunately the returns on capital have diminished from the 9.5% that they were earning five years ago. 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. If these trends continue, we wouldn't expect Crest Builder Holdings Berhad to turn into a multi-bagger.
On a side note, Crest Builder Holdings Berhad's current liabilities are still rather high at 41% of total assets. This can bring about some risks because the company is basically operating with a rather large reliance on its suppliers or other sorts of short-term creditors. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.