Ignoring the stock price of a company, what are the underlying trends that tell us a business is past the growth phase? 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. This reveals that the company isn't compounding shareholder wealth because returns are falling and its net asset base is shrinking. So after glancing at the trends within Bahvest Resources Berhad (KLSE:BAHVEST), we weren't too hopeful.
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. The formula for this calculation on Bahvest Resources Berhad is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.027 = RM3.8m ÷ (RM172m - RM34m) (Based on the trailing twelve months to September 2023).
So, Bahvest Resources Berhad has an ROCE of 2.7%. Ultimately, that's a low return and it under-performs the Metals and Mining industry average of 5.5%.
See our latest analysis for Bahvest Resources 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 want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Bahvest Resources Berhad.
What Can We Tell From Bahvest Resources Berhad's ROCE Trend?
The trend of returns that Bahvest Resources Berhad is generating are raising some concerns. Unfortunately, returns have declined substantially over the last five years to the 2.7% we see today. What's equally concerning is that the amount of capital deployed in the business has shrunk by 59% over that same period. When you see both ROCE and capital employed diminishing, it can often be a sign of a mature and shrinking business that might be in structural decline. If these underlying trends continue, we wouldn't be too optimistic going forward.
On a side note, Bahvest Resources Berhad's current liabilities have increased over the last five years to 20% of total assets, effectively distorting the ROCE to some degree. Without this increase, it's likely that ROCE would be even lower than 2.7%. While the ratio isn't currently too high, it's worth keeping an eye on this because if it gets particularly high, the business could then face some new elements of risk.