When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. Businesses in decline often have two underlying trends, firstly, a declining return on capital employed (ROCE) and a declining base of capital employed. Trends like this ultimately mean the business is reducing its investments and also earning less on what it has invested. Having said that, after a brief look, GUH Holdings Berhad (KLSE:GUH) we aren't filled with optimism, but let's investigate further.
Understanding 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 GUH Holdings Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.012 = RM6.4m ÷ (RM647m - RM115m) (Based on the trailing twelve months to June 2022).
Thus, GUH Holdings Berhad has an ROCE of 1.2%. In absolute terms, that's a low return and it also under-performs the Electronic industry average of 15%.
See our latest analysis for GUH Holdings Berhad
While the past is not representative of the future, it can be helpful to know how a company has performed historically, which is why we have this chart above. If you'd like to look at how GUH Holdings Berhad has performed in the past in other metrics, you can view this free graph of past earnings, revenue and cash flow.
What Can We Tell From GUH Holdings Berhad's ROCE Trend?
We are a bit worried about the trend of returns on capital at GUH Holdings Berhad. Unfortunately the returns on capital have diminished from the 3.3% that they were earning five years ago. Meanwhile, capital employed in the business has stayed roughly the flat over the period. 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. If these trends continue, we wouldn't expect GUH Holdings Berhad to turn into a multi-bagger.
What We Can Learn From GUH Holdings Berhad's ROCE
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. It should come as no surprise then that the stock has fallen 46% over the last five years, so it looks like investors are recognizing these changes. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
One more thing to note, we've identified 1 warning sign with GUH Holdings Berhad and understanding it should be part of your investment process.