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. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. Having said that, after a brief look, Far East Holdings Berhad (KLSE:FAREAST) we aren't filled with optimism, but let's investigate further.

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. The formula for this calculation on Far East Holdings Berhad is:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.058 = RM90m ÷ (RM1.7b - RM110m) (Based on the trailing twelve months to June 2023).

So, Far East Holdings Berhad has an ROCE of 5.8%. On its own that's a low return on capital but it's in line with the industry's average returns of 6.4%.

Check out our latest analysis for Far East Holdings Berhad

Historical performance is a great place to start when researching a stock so above you can see the gauge for Far East Holdings Berhad's ROCE against it's prior returns. If you'd like to look at how Far East 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 Far East Holdings Berhad's ROCE Trend?

In terms of Far East Holdings Berhad's historical ROCE movements, the trend doesn't inspire confidence. Unfortunately the returns on capital have diminished from the 7.4% 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 Far East Holdings Berhad to turn into a multi-bagger.

Our Take On Far East Holdings Berhad's ROCE

In summary, it's unfortunate that Far East Holdings Berhad is generating lower returns from the same amount of capital. However the stock has delivered a 44% return to shareholders over the last five years, so investors might be expecting the trends to turn around. Regardless, we don't feel too comfortable with the fundamentals so we'd be steering clear of this stock for now.