When researching a stock for investment, what can tell us that the company is in decline? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. So after we looked into Gabungan AQRS Berhad (KLSE:GBGAQRS), 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 Gabungan AQRS Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.041 = RM21m ÷ (RM1.3b - RM805m) (Based on the trailing twelve months to September 2023).
So, Gabungan AQRS Berhad has an ROCE of 4.1%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 6.4%.
View our latest analysis for Gabungan AQRS Berhad
In the above chart we have measured Gabungan AQRS 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 report for Gabungan AQRS Berhad.
What Does the ROCE Trend For Gabungan AQRS Berhad Tell Us?
There is reason to be cautious about Gabungan AQRS Berhad, given the returns are trending downwards. To be more specific, the ROCE was 18% 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. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Gabungan AQRS Berhad becoming one if things continue as they have.
Another thing to note, Gabungan AQRS Berhad has a high ratio of current liabilities to total assets of 61%. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.
The Bottom Line
In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. Investors haven't taken kindly to these developments, since the stock has declined 66% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.