If we're looking to avoid a business that is in decline, what are the trends that can warn us ahead of time? More often than not, we'll see a declining return on capital employed (ROCE) and a declining amount of capital employed. This indicates to us that the business is not only shrinking the size of its net assets, but its returns are falling as well. Having said that, after a brief look, Rohas Tecnic Berhad (KLSE:ROHAS) we aren't filled with optimism, but let's investigate further.

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. Analysts use this formula to calculate it for Rohas Tecnic Berhad:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.069 = RM27m ÷ (RM642m - RM245m) (Based on the trailing twelve months to March 2023).

Therefore, Rohas Tecnic Berhad has an ROCE of 6.9%. On its own, that's a low figure but it's around the 5.9% average generated by the Construction industry.

View our latest analysis for Rohas Tecnic Berhad

Above you can see how the current ROCE for Rohas Tecnic 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 report for Rohas Tecnic Berhad.

So How Is Rohas Tecnic Berhad's ROCE Trending?

There is reason to be cautious about Rohas Tecnic Berhad, given the returns are trending downwards. Unfortunately the returns on capital have diminished from the 20% 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 Rohas Tecnic Berhad becoming one if things continue as they have.

The Bottom Line

In the end, the trend of lower returns on the same amount of capital isn't typically an indication that we're looking at a growth stock. This could explain why the stock has sunk a total of 75% in the last five years. With underlying trends that aren't great in these areas, we'd consider looking elsewhere.

One more thing to note, we've identified 2 warning signs with Rohas Tecnic Berhad and understanding them should be part of your investment process.