What underlying fundamental trends can indicate that a company might be in decline? When we see a declining return on capital employed (ROCE) in conjunction with a declining base of capital employed, that's often how a mature business shows signs of aging. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. In light of that, from a first glance at Astro Malaysia Holdings Berhad (KLSE:ASTRO), we've spotted some signs that it could be struggling, so let's investigate.
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 Astro Malaysia Holdings Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.064 = RM270m ÷ (RM5.5b - RM1.3b) (Based on the trailing twelve months to October 2024).
So, Astro Malaysia Holdings Berhad has an ROCE of 6.4%. On its own, that's a low figure but it's around the 7.9% average generated by the Media industry.
View our latest analysis for Astro Malaysia Holdings Berhad
In the above chart we have measured Astro Malaysia Holdings Berhad's prior ROCE against its prior performance, but the future is arguably more important. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Astro Malaysia Holdings Berhad .
What Can We Tell From Astro Malaysia Holdings Berhad's ROCE Trend?
There is reason to be cautious about Astro Malaysia Holdings Berhad, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 23% that they were earning five years ago. And on the capital employed front, the business is utilizing roughly the same amount of capital as it was back then. 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 Astro Malaysia Holdings Berhad becoming one if things continue as they have.
The Key Takeaway
In summary, it's unfortunate that Astro Malaysia Holdings Berhad is generating lower returns from the same amount of capital. We expect this has contributed to the stock plummeting 78% during the last five years. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.