When we're researching a company, it's sometimes hard to find the warning signs, but there are some financial metrics that can help spot trouble early. A business that's potentially in decline often shows two trends, a return on capital employed (ROCE) that's declining, and a base of capital employed that's also declining. This combination can tell you that not only is the company investing less, it's earning less on what it does invest. On that note, looking into Texchem Resources Bhd (KLSE:TEXCHEM), we weren't too upbeat about how things were going.
Understanding Return On Capital Employed (ROCE)
For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. The formula for this calculation on Texchem Resources Bhd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.032 = RM13m ÷ (RM748m - RM348m) (Based on the trailing twelve months to March 2024).
Therefore, Texchem Resources Bhd has an ROCE of 3.2%. Ultimately, that's a low return and it under-performs the Industrials industry average of 6.4%.
See our latest analysis for Texchem Resources Bhd
In the above chart we have measured Texchem Resources Bhd'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 Texchem Resources Bhd .
The Trend Of ROCE
In terms of Texchem Resources Bhd's historical ROCE movements, the trend doesn't inspire confidence. To be more specific, the ROCE was 5.0% five years ago, but since then it has dropped noticeably. On top of that, it's worth noting that the amount of capital employed within the business has remained relatively steady. This combination can be indicative of a mature business that still has areas to deploy capital, but the returns received aren't as high due potentially to new competition or smaller margins. So because these trends aren't typically conducive to creating a multi-bagger, we wouldn't hold our breath on Texchem Resources Bhd becoming one if things continue as they have.
Another thing to note, Texchem Resources Bhd has a high ratio of current liabilities to total assets of 47%. 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. Ideally we'd like to see this reduce as that would mean fewer obligations bearing risks.