What financial metrics can indicate to us that a company is maturing or even in decline? Typically, we'll see the trend of both return on capital employed (ROCE) declining and this usually coincides with a decreasing amount of capital employed. 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. On that note, looking into GUH Holdings Berhad (KLSE:GUH), we weren't too upbeat about how things were going.
Return On Capital Employed (ROCE): What Is It?
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 GUH Holdings Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0061 = RM3.2m ÷ (RM614m - RM89m) (Based on the trailing twelve months to December 2024).
Thus, GUH Holdings Berhad has an ROCE of 0.6%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 12%.
View our latest analysis for GUH Holdings Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for GUH Holdings Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of GUH Holdings Berhad.
So How Is GUH Holdings Berhad's ROCE Trending?
There is reason to be cautious about GUH Holdings Berhad, given the returns are trending downwards. About five years ago, returns on capital were 1.6%, however they're now substantially lower than that as we saw above. 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 GUH Holdings Berhad becoming one if things continue as they have.
In Conclusion...
In summary, it's unfortunate that GUH Holdings Berhad is generating lower returns from the same amount of capital. And long term shareholders have watched their investments stay flat over the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.