When it comes to investing, there are some useful financial metrics that can warn us when a business is potentially in trouble. 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 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 Esthetics International Group Berhad (KLSE:EIG), 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 Esthetics International Group Berhad, this is the formula:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)
0.022 = RM4.2m ÷ (RM265m - RM72m) (Based on the trailing twelve months to December 2023).
So, Esthetics International Group Berhad has an ROCE of 2.2%. Ultimately, that's a low return and it under-performs the Consumer Services industry average of 9.9%.
Check out our latest analysis for Esthetics International Group Berhad
Historical performance is a great place to start when researching a stock so above you can see the gauge for Esthetics International Group Berhad's ROCE against it's prior returns. If you want to delve into the historical earnings , check out these free graphs detailing revenue and cash flow performance of Esthetics International Group Berhad.
What The Trend Of ROCE Can Tell Us
In terms of Esthetics International Group Berhad's historical ROCE movements, the trend doesn't inspire confidence. About five years ago, returns on capital were 3.9%, however they're now substantially lower than that as we saw above. Meanwhile, capital employed in the business has stayed roughly the flat over the period. Since returns are falling and the business has the same amount of assets employed, this can suggest it's a mature business that hasn't had much growth in the last five years. If these trends continue, we wouldn't expect Esthetics International Group Berhad to turn into a multi-bagger.
In Conclusion...
In summary, it's unfortunate that Esthetics International Group Berhad is generating lower returns from the same amount of capital. Investors haven't taken kindly to these developments, since the stock has declined 30% from where it was five years ago. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.