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. Basically the company is earning less on its investments and it is also reducing its total assets. In light of that, from a first glance at Crest Builder Holdings Berhad (KLSE:CRESBLD), we've spotted some signs that it could be struggling, so let's investigate.
Return On Capital Employed (ROCE): What Is It?
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 Crest Builder Holdings Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.016 = RM11m ÷ (RM1.2b - RM558m) (Based on the trailing twelve months to March 2024).
Therefore, Crest Builder Holdings Berhad has an ROCE of 1.6%. Ultimately, that's a low return and it under-performs the Construction industry average of 7.7%.
View our latest analysis for Crest Builder Holdings Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Crest Builder Holdings Berhad's ROCE against it's prior returns. If you're interested in investigating Crest Builder Holdings Berhad's past further, check out this free graph covering Crest Builder Holdings Berhad's past earnings, revenue and cash flow.
What The Trend Of ROCE Can Tell Us
We are a bit anxious about the trends of ROCE at Crest Builder Holdings Berhad. Unfortunately, returns have declined substantially over the last five years to the 1.6% we see today. On top of that, the business is utilizing 27% less capital within its operations. The combination of lower ROCE and less capital employed can indicate that a business is likely to be facing some competitive headwinds or seeing an erosion to its moat. If these underlying trends continue, we wouldn't be too optimistic going forward.
On a side note, Crest Builder Holdings Berhad's current liabilities are still rather high at 45% of total assets. This effectively means that suppliers (or short-term creditors) are funding a large portion of the business, so just be aware that this can introduce some elements of risk. While it's not necessarily a bad thing, it can be beneficial if this ratio is lower.
The Bottom Line On Crest Builder Holdings Berhad's ROCE
In summary, it's unfortunate that Crest Builder Holdings Berhad is shrinking its capital base and also generating lower returns. It should come as no surprise then that the stock has fallen 28% 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.