What financial metrics can indicate to us that a company is maturing or even in decline? 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. Ultimately this means that the company is earning less per dollar invested and on top of that, it's shrinking its base of capital employed. In light of that, from a first glance at Gadang Holdings Berhad (KLSE:GADANG), we've spotted some signs that it could be struggling, so let's investigate.
What Is Return On Capital Employed (ROCE)?
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 Gadang Holdings Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.0027 = RM2.9m ÷ (RM1.4b - RM346m) (Based on the trailing twelve months to November 2023).
Therefore, Gadang Holdings Berhad has an ROCE of 0.3%. In absolute terms, that's a low return and it also under-performs the Construction industry average of 8.1%.
View our latest analysis for Gadang Holdings Berhad
Above you can see how the current ROCE for Gadang Holdings Berhad compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like to see what analysts are forecasting going forward, you should check out our free analyst report for Gadang Holdings Berhad .
What The Trend Of ROCE Can Tell Us
There is reason to be cautious about Gadang Holdings Berhad, given the returns are trending downwards. To be more specific, the ROCE was 8.9% five years ago, but since then it has dropped noticeably. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Companies that exhibit these attributes tend to not be shrinking, but they can be mature and facing pressure on their margins from competition. If these trends continue, we wouldn't expect Gadang Holdings Berhad to turn into a multi-bagger.
What We Can Learn From Gadang Holdings Berhad's ROCE
All in all, the lower returns from the same amount of capital employed aren't exactly signs of a compounding machine. Investors haven't taken kindly to these developments, since the stock has declined 32% from where it was five years ago. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.
On a final note, we've found 1 warning sign for Gadang Holdings Berhad that we think you should be aware of.