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. Basically the company is earning less on its investments and it is also reducing its total assets. On that note, looking into Wang-Zheng Berhad (KLSE:WANGZNG), we weren't too upbeat about how things were going.
What Is Return On Capital Employed (ROCE)?
If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. To calculate this metric for Wang-Zheng Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.014 = RM3.0m ÷ (RM284m - RM78m) (Based on the trailing twelve months to June 2024).
Thus, Wang-Zheng Berhad has an ROCE of 1.4%. In absolute terms, that's a low return and it also under-performs the Forestry industry average of 3.1%.
See our latest analysis for Wang-Zheng 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 Wang-Zheng Berhad.
The Trend Of ROCE
We are a bit worried about the trend of returns on capital at Wang-Zheng Berhad. Unfortunately the returns on capital have diminished from the 4.0% that they were earning five years ago. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. 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 Wang-Zheng Berhad becoming one if things continue as they have.
What We Can Learn From Wang-Zheng 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. Investors haven't taken kindly to these developments, since the stock has declined 27% from where it was five years ago. Unless there is a shift to a more positive trajectory in these metrics, we would look elsewhere.
If you want to know some of the risks facing Wang-Zheng Berhad we've found 3 warning signs (1 doesn't sit too well with us!) that you should be aware of before investing here.